Yesterday (23 April) we got a record close on the FTSE 100. At 8,023 points, it pushed to fresh all-time highs. The performance of the index contrasts to stock markets around the world. For example, in the US the S&P 500 index is down 4% this month alone. So what’s going on here and how can I profit from it?
Looking for diversification
The main reason why I believe the FTSE 100 has jumped to all-time highs is that global investors are allocating more funds to the UK.
Over the past year, US markets have been outperforming. For example, during this period the S&P 500 index is up 21%, in contrast to the 2% gain for the FTSE 100. Yet over the past month or so, I think some investors are becoming concerned that the US might be overvalued and have the potential for a correction lower.
Therefore, I think some are selling US stocks and buying UK ones instead that are much cheaper. This would tie in with US markets falling while the UK is pushing higher.
Another reason is the fact that the market is now expecting the UK to cut interest rates later this summer. This should provide relief for consumers and businesses alike.
The action plan
Based on my thoughts, the best stocks to buy may be those with low valuations that trade internationally but do have exposure to the UK.
One example that ticks these boxes is British American Tobacco (LSE:BATS). The stock has jumped 3.5% already this week, but is still down 19% over the past year. With a price-to-earnings ratio of 6.28, it’s below the benchmark figure of 10 that I use to assign a fair value.
The 2023 results did show that revenue was down 1.3%, due to lower volume from traditional cigarettes. However, New Categories organic revenue was up 21% versus last year. This is the area that houses brands such as Vuse and Velo, both of which are becoming a larger part of the business going forward.
As the firm continues to pivot to vaping and alternative products, I think there’s a large market potential here for growth. A risk is that other brands are trying to muscle in here too. For example, the firm recently had to settle with Philip Morris International to resolve all ongoing patent infringement litigations.
Given that the business has exposure to the UK as well as the rest of the world, I feel it’s well placed to benefit if the UK economy starts to outperform thanks to rate cuts.
Buying at the highs
I know it feels uncomfortable buying at all-time highs. That’s why I’m looking for value stocks within the index that have scope for growth. I’m thinking about buying British American Tobacco shares, and will continue to hunt for similar ideas for my portfolio.
