The FTSE 100 has handily outperformed the S&P 500 this year. The US index has declined by 22%, while the UK index has only lost 4.23%.
I think that this is because the composition of the FTSE 100 allows it to handle inflation and rising interest rates much better than its US counterpart. Furthermore, I expect this recent trend to continue for some time.
Inflation
Inflation has been one of the major macroeconomic themes of 2022. One of the most obvious examples of this is oil, which has increased in price from around $76/barrel to around $120/barrel.
High oil prices have been positive for energy stocks. Shares in BP are up around 25% and shares in Chevron have gained 47%.
Since energy stocks make up around 9.5% of the UK index, compared to 2.67% of the S&P 500, this has had a disproportionate effect on the FTSE 100.
Inflation has also been positive for mining stocks. In the UK, Rio Tinto stock is up 16% since the start of January and Vale in the S&P 500 has seen its stock rise by 22%.
Commodities stocks are also a bigger part of the FTSE 100 (13.39%) than the S&P 500 (2.56%). So inflationary effects on mining stocks have also helped the UK index more than the US one.
Rising interest rates
On the other side of the coin, the US index has been disproportionately affected by forces driving stock prices down. Rising interest rates have been exerting pressure on stock prices, especially those trading at high price-to-earnings (P/E) multiples.
At the start of the year, the S&P 500 was trading at a P/E ratio of around 23. The FTSE 100, by contrast was trading at a P/E ratio just below 15.
This is partly due to the US index having a much higher concentration of technology stocks (29%) compared to the UK index (1.41%). These tend to trade at higher P/E ratios, making them more vulnerable to rising interest rates.
Rising interest rates have therefore hit the US index harder. The UK index, by contrast, has been somewhat shielded from the effects of rising interest rates.
Looking forward
It’s worth noting that the outperformance of the FTSE 100 is a relatively recent phenomenon. Over the past five years, the S&P 500 has advanced 60%, compared to a 2% decline for the FTSE 100.
Nonetheless, I don’t see the current macroeconomic situation changing any time soon. I think that the effects of inflation will persist for some time and interest rates will continue rising.
On top of that, I think that the attempts of central banks to control inflation will likely bring on a recession in the next couple of years. That means that I’m expecting the FTSE 100 to continue to outperform the S&P 500.
As a result, I think that now might be a great time to buy shares in UK businesses. I’m looking to evaluate companies individually, rather than buying into an index, but I think that there might be some good opportunities for me in the FTSE 100.