So far, 2022 has been brutal for investors right around the globe. For example, the US S&P 500 index has crashed by more than a fifth (-21.3%) since 31 December 2021. The Nasdaq Composite index has fared even worse, crashing by 30.6% in 2022. Indeed, collapsing share and bond prices have left the average US personal portfolio down roughly 44% in 2022. Yikes. However, the UK’s FTSE 100 index has been a relatively calm port in this global storm.
The FTSE 100 dodges the bear market
For many years, the London market (and notably the FTSE 100) has traded at big discounts to other major stock markets, particularly US shares. In 2020-21, go-go growth investors flocked to buy US tech stocks and fast-growing companies at ever-higher valuations. This strategy worked a treat until November 2021, when the tech-heavy Nasdaq index peaked and then started plunging. The S&P 500 duly followed suit, crashing hard after peaking on 4 January.
In late 2022, I repeatedly warned that US stocks — and tech shares in particular — looked horribly expensive in historical terms. I also argued that large-cap UK shares — those in the FTSE 100 and upper FTSE 250 indexes — were trading on very low valuations. To me, UK shares looked remarkably cheap, perhaps because they were so unwanted and unloved by global investors.
As it happens, this relative cheapness of UK shares protected them from the worst of this year’s price collapses. While the US market is in a bear market (down 20%+ from a previous high), the FTSE 100 remains far from a full-blown market meltdown.
On Friday, the Footsie closed at 6,969.73 points. This leaves it 717.54 points below its 52-week high of 7,687.27, hit on 10 February — just two weeks before Russia invaded Ukraine. In other words, the UK’s blue-chip index has lost less than a tenth (-9.3%) of its value since its 2022 high. Phew!
UK shares still look cheap to me
Right now, the FTSE 100 trades on a price-to-earnings (PE) ratio of 13.5, which translates into an earnings yield of 7.4%. In addition, it offers a dividend yield of 4.2% a year, which is a major attraction for me as an income/value investor. Meanwhile, the S&P 500 has a PE ratio of 18.3, an earnings yield below 5.5%, and a modest cash yield of 1.8% a year.
To me, these figures suggest that UK shares still seem cheaper than US stocks, even after big falls in the US. Then again, Britain is in a real mess and faces an ‘omnishambles’ of problems. As well as political chaos, Brexit obstacles and a cost-of-living crisis, interest rates are soaring. This puts intense pressure on mortgage borrowers and the housing market. So perhaps UK shares are cheap for good reasons?
I’ll keep buying Footsie shares
For the record, I don’t think the FTSE 100 will crash into a bear market. After all, the UK’s woes have little impact on the foreign earnings of mega-cap energy, mining and commodity companies. Also, roughly 70% of Footsie earnings come from abroad — and these are worth more due to the weaker pound.
Finally, I’m set to start building a new mini-portfolio of undervalued UK shares trading on low P/E ratios and offering high dividend incomes. Watch this space for more news!