The FTSE 100 has has a poor 2023. The UK’s leading stock-market index — valued at over £2trn — has produced modest returns while global rivals have soared. Even so, I see the Footsie as offering outstanding value at current levels.
The Footsie flops
Currently, the blue-chip index stands at 7,718.09 points. Here’s how it has performed over five timescales (excluding dividends):
| One month | 3.5% |
| Six months | 2.9% |
| 2023 to date | 3.6% |
| One year | 3.0% |
| Five years | 14.6% |
London’s elite index has produced low-single-digit returns over periods ranging from one month to one year. Over half a decade, its return is also around 3% a year.
By contrast, its American rival — the global powerhouse S&P 500 index — has leapt by 24.6% in 12 months. Over five years, the leading US index has almost doubled, soaring by 92%.
It’s a similar tale for other major stock-market indices, with those in Europe (including France and Germany) and Japan thrashing the FTSE 100 over five, 10 and 20 years.
Given that the UK market has been a long-term lemon and a ‘graveyard filled with value shares’, why would I choose to buy it? Surely I’d be better off backing the US and its mega-cap tech winners?
The S&P looks pricey to me
Today, the S&P 500 index looks priced close to perfection to me. It trades on a hefty 21.8 times earnings, which translates into a modest earnings yield of 4.6%.
In addition, the US index is low-yielding, delivering a dividend yield below 1.5% a year. However, this is covered a healthy 3.1 times by historic earnings.
To me, these figures indicate that US stocks look expensive. However, these fundamentals are well below levels seen during the speculative stock-market peaks of 2000 and mid-2007.
Unbelievably cheap?
On the other hand, the FTSE 100 looks wildly cheap to me. It trades on just 11.3 times trailing earnings, delivering an earnings yield of 8.8%. This makes it roughly half as ‘expensive’ as its US counterpart.
What’s more, the Footsie offers a world-beating dividend yield of 4% a year. This cash yield is covered a solid 2.2 times by earnings, giving scope for future uplifts. Also, UK companies are spending billions of pounds buying back their shares, further boosting investors’ returns.
The same old story?
Alas, the FTSE 100 has been something of a long-term lemon going back to 2000. In particular, it has shown sustained weakness after the mid-2016 Brexit vote to leave the European Union.
In short, both local and international investors prefer almost every other major stock market to London. Even our biggest pension and insurance funds hold only modest stakes in UK companies. So what’s set to change? I can’t really say, but markets can and do take years to re-price upwards.
Personally, given how utterly cheap the Footsie is, I’m prepared to give it the benefit of the doubt. Hence, my wife and I own low-cost index trackers, as well as 17 different FTSE 100 shares, plus five other FTSE 250 shares. I believe my faith in value investing will work out in future!
