By Philip Lawlor, managing director, Global Markets Research
UK factors seem to be dancing to the beat of a different drummer than those in other equity markets. Last year, while its global peers held to a strong defensive bias, the riskier Size (or smaller-cap) factor not only outstripped all other factors in the UK but everywhere else as well.
Similarly, amid this year’s brutal sell-off, the outperformance of defensive factors was far more muted in the UK than elsewhere, even as the UK Size rally evaporated. Quality lagged in the UK (bucking the global trend), while Low Volatility, followed by a modest rebound in Profitability, were the standout performers.
To illustrate these stark divergences, the chart below compares the relative returns of Quality and Size between the UK and the US.
Source: FTSE Russell. Data as of March 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
Differing exposures to sectors and macro sensitivities Sector exposures explain much of this performance gap. For example, UK Quality is far less weighted toward health care stocks than its US counterpart (a difference of 3.5 percentage points), which were among the more resilient sectors in both markets over the past 12 months. US Quality also got a bigger boost from technology stocks, which rose strongly in the US but fell sharply in the UK. Moreover, UK Quality is significantly more overweight oil & gas and basic materials, among the worst performers of the past year.
UK Quality also benefited far less than its peers from the widespread rotation into stocks with lower debt burdens, a key gauge of corporate quality. As the top chart below shows, measures of low leverage, led by forward net debt/equity, significantly outperformed in the US, but significantly lagged in the UK.
The differences between the two markets were less extreme when we isolated the components of high profitability, as the second chart below illustrates. In particular, forward ROE performed far better in the UK than in the US.
Leverage factor components relative returns vs broad market – Q1 2020
Profitability factor components relative returns vs broad market – Q1 2020
Source: FTSE Russell. March 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
UK factors are also more sensitive than those in the US to shifts in key macroeconomic metrics. Notably, UK Value and Size are far more negatively correlated to moves in the US dollar than their US counterparts, while UK Low Volatility, Profitability and Quality are more positively correlated.
Correlations to US Dollar Since March 2019
Source: FTSE Russell. March 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Much of the spectacular outperformance of UK Size in Q4 2019 was driven by the strong appreciation in sterling amid waning hard-Brexit fears, which favored smaller-cap, more domestically oriented UK stocks over their large-cap, globally exposed peers. Sterling weakness also explains the factor’s subsequent downfall this year.
UK Size relative return to broad market (rebased, TR) vs trade-weighted sterling
Source: FTSE Russell. March 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Subscribe to our blog.
© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.
