I’m increasingly looking at the FTSE for my investments. The UK stock market gives me access to hundreds of international firms, although nowhere near as many as US markets. In fact, unfortunately, we’re seeing more and more companies dismiss the FTSE in favour of a New York listing.
So, why am I favouring the FTSE? Let’s take a closer look.
Currencies
I’m starting with a fairly obvious note. The pound is weaker than it was a year ago. In fact, at $1.20, the pound is around 10% cheaper than it was a year ago. It’s also weak on a long-term basis, and far below the $2 we saw around 2007.
Essentially this means that US stocks cost more today in pound terms than they did a year ago — assuming their dollar value has remained constant.
Despite concerns about the UK economies, I’d also suggest that the pound will appreciate in the coming years. As such, any share price gains from US investments could be wiped out by an appreciating pound.
Valuations
The average price-to-earnings (P/E) ratio on the S&P 500 is around 21. By comparison, the FTSE 100 has an average P/E of 14.
This doesn’t mean that US stocks are 50% more expensive. It doesn’t work like that. It’s hard to compare the two indexes because the S&P 500 contains different stocks, and lots of growth stocks — which are valued based on future earnings.
However, it is widely considered that US stocks receive higher valuations than stocks in the UK. This means the FTSE can offer cheaper valuations and higher dividend yields.
In fact, it’s because of these higher valuations in the US that companies like CRH and Arm, are looking to the US rather than the UK to raise capital on public markets.
Finding value
As such, I’m looking for value stocks on the FTSE. But investing in value requires me to do some research.
There’s no best way to value stocks, but I can use both near-term and long-term valuations to generate an understanding.
Near-term valuations include the EV-to-EBITDA ratio or the P/E metric. And I need to compare these among peers within a sector.
For me, UK banks are a good place to start, especially those focused on the British market. Lloyds makes all of its sales in the UK, and is heavily focused on the UK mortgage market.
It trades with a P/E of 7.5 despite the presence of a huge interest rate tailwind that should last for two years. Long-term prospects also appear positive with many analysts forecasting a higher-than-average interest rate.
Naturally, Lloyds’ UK-dependency makes it higher risk than other banks such as HSBC, but that’s why it’s cheaper. However, it’s a risk I’ve been willing to take, and I’ve frequently topped up my position in Lloyds.
I’ve also bought stocks like Aviva, GSK, and Phoenix Group as part of my strategy to buy undervalued UK-listed stocks.
