Mark Lister, 23 February 2023

Last year was a tough one for global sharemarkets, with the US falling 18.1 per cent and the local NZX 50 index experiencing a 12.0 per cent decline.

Europe and Japan were about ten per cent lower, while emerging market shares (which include China) slumped 19.7 per cent.

However, there was one market that bucked the trend and finished in the green.

The FTSE 100 in the UK delivered a 4.7 per cent return (including dividends) last year, in stark contrast to the sea of red elsewhere.

Despite a recent rebound, world shares are still 15.0 per cent below the peak of late 2021, while the domestic market is 10.4 per cent lower.

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Meanwhile, the UK has picked up where it left off, pushing higher in 2022 and last week reaching a new all-time high.

On the face of it, this doesn’t make a lot of sense.

The UK hasn't been a shining light of political stability in recent years, and its proximity to the conflict in Ukraine can't have been great for investor confidence.

The strong performance of the UK market is down to the type of companies is comprised of, and the fact that many of these are multinationals.

The industries that dominate a sharemarket have a big impact performance during different economic and market backdrops.

The US, for example, is heavily skewed to the technology sector, which represents more than a quarter of the S&P 500 index.

If one includes Amazon, Meta (formerly Facebook) and Alphabet (owner of Google) – all of which are officially classified in different sectors – the weighting is a lot higher.

This saw the US market perform extremely well during the pandemic, as e-commerce and remote working surged, and interest rates were very low.

In 2022, however, we saw increasing commodity prices, high inflation and rising interest rates.

These conditions are much less friendly to higher-growth companies, which is part of the reason the US has had a more difficult time of late.

In contrast, this current environment has been well-suited to the UK, where the materials and energy sectors represent about a quarter of the market.

These include mining businesses, as well as oil and gas companies, all of which historically perform well during periods of high inflation.

The FTSE 100 only has a one per cent exposure to technology. That was a major handbrake on performance during the low-interest rate years, but it suddenly become a tailwind in 2022.

Healthcare and consumer staples are two other sectors that are dominate the UK, representing a third of the FTSE 100 index.

These tend to hold up better than most during periods of uncertainty, and they also derive a lot of their revenues from overseas.

About 80 per cent of the total sales for FTSE 100 companies come from outside the UK. This means the market isn’t tied to the fortunes of the economy, and economic weakness can often boost earnings if it means a lower British pound.

New Zealand isn’t dissimilar. Our economy is based around the primary sector, tourism and an assortment of small businesses.

However, our sharemarket is hardly a mirror image of that. It is instead dominated by large, mature companies in the utilities, real estate, healthcare and infrastructure sectors.

All sharemarkets have their own characteristics, which means they can perform very differently depending on the economic backdrop.

The UK is well-positioned at the moment, as is the Australian market, which shares many similar attributes.

In contrast, the US could remain under pressure while inflation and interest rates remain high.

This won’t always be the case and this time next year, things could be different.

The lesson for investors is to understand the nuances between these markets, and hedge their bets by having a bit of all of them.