Back in September, I pointed out that the UK stock market looked cheap compared to American stocks.
As the Covid-19 pandemic took hold in early 2020, stock markets around the world swooned. But by late summer, most had recovered. America’s broadly-based S&P 500 index – infinitely preferable to the tightly-focused Dow Jones – was up 59% from 23 March’s panic-induced slump, and an impressive 4% higher than its 2020 pre-lockdown peak of 19 February.
But the sluggish FTSE 100, meanwhile, stood at 5,886, a mere 18% up on 23 March’s equally panic-induced low point of 4,994.
“Right now,” I wrote, “the Footsie looks under-priced. Certainly with respect to America, and – in my view – almost certainly with respect to the real state of the UK economy.”
I was right
As I write these words, the Footsie is now 14% higher than back then.
Yet as I also wrote, “Companies – and industries – are recovering at different rates. More than ever, picking the right stocks matters. But the bargains are there.”
They certainly were.
Industrial firm Weir Group is up 55%. Banking giant HSBC up 25%. Mining group Anglo-American up 44%. Commercial property landlord British Land up 31%. Oil giant Royal Dutch Shell up 26%. Pasty and sausage roll retailer Greggs up 53%.
And so on, and so on.
To repeat: the bargains were there, in short. And later that month, and in early October, I made a number of judicious buys for my own portfolio.
Upside aplenty
Yet I reckon bargains are still to be had. Okay, the Footsie is up by 14%. Yet the S&P 500 has risen by 10%. So while the valuation gap has closed a little way, it’s not closed by very much.
And certainly, the great slide in relative valuations that began around the time of the Brexit referendum leaves plenty of room for upside for the Footsie, even if you believe – as I do – that post-election America is looking a little frothy right now.
Since February 2016, the Footsie has risen just 18%. (Yes, I know: another 18% rise. But just a coincidence, and over very different periods.) Obviously, investors’ total returns should be better than that, due to dividend payments.
But on the same basis, the S&P 500 is up 111%. 18% versus 111%? That’s quite a gulf.
And if the Footsie had delivered even half the growth of the S&P 500, I calculate that it would be trading at a level of around 8,720 today – roughly 2,000 points higher than where it actually is trading today.
A growing chorus
Other people are now seeing – and saying – the same sort of thing. In the past few weeks, I’ve seen commentary in several places, all making the same broad argument. The Financial Times, Royal London, Fidelity, Cazenove Capital… and others besides.
That isn’t to say that they – or me – are correct, of course.
And that certainly isn’t to say that the valuation gap will close – or even narrow – to any kind of timetable. The UK economy shrank by over 9% in 2020, and – as we all know – a global pandemic is still raging, with new virus variants emerging.
Yet for me, my own course of action is clear. I’ve been buying UK equities since September, and plan to carry on doing so. Much as I’m a fan of international diversification, I think that right now, the UK stock market is too big an opportunity to ignore.