UK equities: Global diversification hiding in plain sight

Key takeaways

• A global market: Large cap companies in the UK market provide broad international exposure, despite often being viewed as domestic businesses.
• Broad sources of return: The UK market offers exposure across geographies, sectors and investment styles. This stands in contrast to global equity portfolios, which have become increasingly concentrated in US mega cap tech stocks.
• Appealing valuation opportunity: UK equities are trading at around a 30% discount to global peers¹, offering global exposure at appealing valuations.

We are at the tail end of a multi-decade trend where UK investors have searched for diversification through global equity allocations. Yet global indices have become increasingly concentrated in US equities over this time, in particular large technology companies. After years of reallocating away from the UK, it may be time to reassess the breadth of exposure and value available in the domestic market.

Global revenues

UK equities are often seen as a domestic allocation, but the reality is far more global. To put this into perspective, over 70% of FTSE 100 index revenues² are earned overseas. These multinational businesses span sectors, with revenues and profit drivers shaped as much by global demand as by the UK economy.

Sector exposure

The UK market is often described as more “traditional”, reflecting its sizeable allocations to the cyclical financials and commodities sectors. Yet it also offers meaningful exposure to more defensive areas such as utilities, health care and consumer staples. This mix means returns can be driven by a broader set of factors and may help smooth performance across the economic cycle.

Style exposure

The UK market has a strong dividend culture, with income forming a key component of UK equity investors’ total returns. As a result, it offers a wide range of income-oriented companies across most sectors, providing ample scope to construct UK income portfolios. In recent years, attractive dividend yields have also been complemented by a growing use of share buybacks, further supporting shareholder returns.

The UK also has a tilt towards value stocks and, when combined with its income orientation, a UK equity allocation can act as a useful style counterbalance to heavy growth allocations by introducing differentiated return drivers.

Valuations

UK equities trade at a sizeable discount to the MSCI World Index, even after accounting for differences in sector composition. In our view, this partly reflects persistent negative sentiment towards the domestic economy. However, current valuations appear to underappreciate the global nature of UK-listed companies' earnings. This creates an opportunity to access international growth through UK equities - at a discounted price.

Time to take another look

UK equities offer a compelling combination of global revenue exposure, sector breadth and income generation. Together, these characteristics can help balance portfolios that are increasingly concentrated elsewhere. And when you then consider its relatively attractive valuations, the UK is certainly a market worth revisiting.