The FTSE looks cheap right now.
As many Fools know, the UK market is dominated by a small number of shares. In fact, nearly 70% of the FTSE 100 index is accounted for by its top 20 constituents.
Essentially, these shares are the market, and so their fortunes dictate the performance of most people's portfolios, investment funds and pensions.
Here's how cheap they look at the moment:
Source: Bloomberg, 5 July 2011
Looking at the above table, three points stand out for me.
1. This market looks pretty cheap
At first glance anyway, the UK market looks good value at the moment, with a forward P/E of under 11 and a respectable dividend yield to boot. Most of these companies' year ends are 31 December, so we can be reasonably confident that these profits (and dividends) will be delivered as forecast.
Indeed, eight of the top 20 are on P/Es of less than 10, while seven of the top 20 should earn you 4% or more in dividend income. Tasty stuff.
2. Domestic banks no longer matter
When investors think of banks, they mostly focus on the trio of Barclays, Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS). This unholy trinity regularly top the lists of most-traded shares published by online stockbrokers. But only Barclays manages to claim a spot in the top 20 right now, and a lowly one at that. Moreover, all three have a lower weighting in the FTSE 100 than Standard Chartered.
Royal Bank of Scotland currently sits at number 43 in the FTSE 100 index, with a feeble 0.4% weighting. You might be surprised to learn that ARM Holdings (LSE: ARM), at 0.5%, now has more impact on the daily movement of the UK's benchmark index. I certainly was.
When the government's stakes in Lloyds and RBS are released back into the wild, this situation will change. But for the time being, the ups and downs of the domestic banks don't have much effect on the FTSE.
3. Investors are wary of commodities
The third thing that strikes me from this table is the low P/Es of the two big oil shares and the various major miners. BP on a P/E of 6 and Rio on a little over 7 stand out in particular. BG, constantly surrounded by takeover speculation, is a notable exception.
Most of these companies are expecting higher profits this year, due to recent rises in commodity prices. But how sustainable will these increased earnings turn out to be over the next few years? Given the low P/Es we can see across the board for these companies, investors seem to think there's trouble ahead. This, in turn, could mean the UK market is not quite as cheap as it first appears.
What's your view on the value of UK shares at the moment? Are you buying, selling or sitting tight? Let us know in the comments section below.
More on the markets:
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