UK stocks are much cheaper than their US counterparts. So, as a UK investor, I’m looking increasingly at the FTSE 350 and only eyeing US-listed stocks in exceptional circumstances.
Let’s take a closer look at why I think this.
Mighty Greenback
Let’s start with something very simple. The dollar is very strong right now. Don’t get me wrong, it was stronger against the pound when Liz Truss’s disastrous budget sent sterling tumbling. But in a broader context, the dollar is strong now against sterling.
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So, what does this mean? Well, if an investor has dollars, they can buy more UK-listed stock for their money now than they could a year or two years ago, purely because of currency fluctuations. The dollar is around 10% stronger against the pound today than it was a year ago.
For example, Lloyds — one of my favourite stock picks — is flat over 12 months. A year ago, a share in the bank would have cost an American investor 67c, today it’d cost them just 60c. That’s without any movement in the share price.
The final point is that, in the long run, I see the pound appreciating against the dollar and moving in line with longer-term averages. So, even if the share price remained flat, the dollar value of the investment would increase.
Valuation
The average price-to-earnings (P/E) ratio on the FTSE 100 is 14.2, while the average P/E on the S&P 500 is around 21. Normally, a higher P/E ratio suggests that a firm either has greater growth prospects or that it is simply overvalued in comparison to its peers.
However, it’s hard to make direct comparisons in this way. After all, the US index is better populated with stocks offering higher growth. Meanwhile, the FTSE 100 is more heavily populated with resource stocks — which typically trade with lower P/Es — than tech, a typical growth stock.
But broadly speaking, the US index does appear to be getting a bit expensive. And several forecasts suggest the S&P could fall considerably this year.
One such forecast is from legendary British investor Jeremy Grantham. The co-founder of GMO — an investment management firm established in 1977 — believes that the S&P 500 will fall 16.7% by year’s end. This reflects a 20% real decline for 2023.
By contrast, the FTSE 100 could push up to 9,275 by July, according to the Economic Forecast Agency. That’s the upper end of its forecast, but its average forecast for July is 8,750 — that’s 12.5% up from today’s position.
Improving UK outlook
Finally, we know shares prices are depressed when the economic forecast is weak. And it’s certainly been the case that the UK’s 2023 forecast hasn’t been good, especially compared with the US.
However, things are changing. It’s still not particularly rosy, and there will be continued pressures on sectors such as housebuilding. But some analysts are now suggesting that the UK will avoid a recession this year. That’s a huge turnaround. And, in my view, it could get better. I’m hoping the new Brexit agreement on Northern Ireland will unlock billions in investment too.
