While it’s quite possible that I could be proved wrong, I think this might be a terrific time for investors to buy into the elite FTSE 100 index. Why? Because only very rarely have top UK shares been cheaper than they are today — and those previous occasions usually paid off big-time for patient buyers.
The FTSE 100 is unloved and undervalued
When I talk to fellow investors these days, very few have anything good to say about the UK economy. After all, British consumers are struggling in the face of rising interest rates, pumped-up prices and sky-high energy bills. As a result, I have met some young investors who have never bought any UK company shares. Wow.
But the first point I’d make is that the FTSE 100 is packed with multinational businesses, many of which are global giants and among the leaders in their fields. However, these are often in old-economy sectors, including oil & gas producers, miners, tobacco companies, utility groups, banks, insurance companies, and more.
Although these businesses are relatively boring compared to go-go US tech firms, there’s still plenty of profit to be made in these fields. Consequently, at least seven-tenths (70%+) of FTSE 100 earnings are made overseas.
Therefore, when investors back the FTSE 100 — often by buying index-tracking and exchange-traded funds — they’re mostly backing global growth. And that’s my first reason why I think the Footsie is unfairly undervalued.
It looks crazily cheap to me
In one way or another, I’d guess that at least half of my family’s wealth is linked to the US economy, stocks and companies. That’s partly because we own large holdings in global tracker funds — and the American stock market is the biggest in the world by miles.
Then again, I see US stocks as a wee bit pricey right now. For example, the S&P 500 index currently trades on a multiple of 20.4 times earnings, delivering an earnings yield of 4.9%. Also, it has only a modest dividend yield of 1.5% a year, albeit covered around 3.3 times by earnings.
On the other hand, the FTSE 100 looks outrageously cheap to me today. It trades on a price-to-earnings multiple of a mere 10.5, for a tidy earnings yield of 9.5%. Meanwhile, its healthy dividend yield of 4.1% a year is covered more than 2.3 times by earnings.
While I can’t be absolutely sure, I strongly suspect that the Footsie’s relative cheapness can’t continue forever. Eventually, value investors like me will see its attractions and snap up more and more cheap UK shares. Over time, such sustained buying pressure should push up the index’s value.
Lastly, my wife has just received a tax-free windfall from her long-term savings. She plans to donate part of this bonanza to our two children to boost their financial futures. Hence, I’ve suggested that they could do a lot worse than to invest these sums into an ultra-low-cost FTSE 100 tracker for a few years!
