Since the Brexit vote, many investors have understandably become nervous about the prospects for the UK economy. There’s a good chance the UK will experience at least some kind of economic slowdown which could spark a recession. Therefore, investing in UK-focused companies could become less appealing to UK-based investors.
As a result, they may be wondering whether it’s worth considering investing in other countries. For example, in the US via the Dow Jones (DJINDICES:DJI) or S&P 500 (SNPINDEX:GSPC), or in Germany via the DAX. Those two economies may not be about to endure a period of such great uncertainty as is the case for the UK. Therefore, domestically-focused companies could have superior near-term prospects compared to their British counterparts. And due to the US economy moving from strength to strength and the German economy continuing to benefit from a relatively weak euro, their prospects are rather bright.
Outperformance
Certainly, all three indices have outperformed the FTSE 100 (INDEXFTSE: UKX) in the last five years. While the UK’s index has risen by just 9%, the S&P 500 is up by 56%, the Dow Jones by 42% and the DAX by 31%. However, this could indicate that the FTSE 100 now offers better value for money than its three peers and that a buying opportunity exists in a post-Brexit vote world as there are likely to be wider margins of safety on offer.
Clearly, the UK economic outlook is uncertain, but the reality is that the majority of FTSE 100 earnings are derived from outside of this country. This means it’s a truly international index and so its long-term performance may not differ all that much from the returns of its three peers. In an increasingly globalised world the four indices should in theory deliver similar levels of performance. Therefore, it could be argued that the bulk of the returns from the four indices should be broadly similar due to the major impact of global economic growth on their performance.
Diversified indexes
Of course, the Dow Jones is price-weighted, while the FTSE 100, S&P 500 and DAX are weighted by market capitalisation. This will give different performance in the same economic environment, while the DAX and Dow Jones have just 30 constituents apiece versus 100 and 500 for the FTSE 100 and S&P 500 as their names make clear. This means that the latter two are much more diversified and offer investors reduced company-specific risk. For many investors who are feeling somewhat nervous right now, this could prove to be a useful ally.
Meanwhile, the FTSE 100 has a far superior yield to its three international peers. It yields around 3.7% versus 2.5% for the DAX, 2.2% for the S&P 500 and 2.5% for the Dow Jones. At a time when interest rates in the UK are mooted for a fall in the coming months and the threat of inflation is lurking due to weaker sterling making imports more expensive, a higher yield could be a fillip for UK-based investors. A higher yield also indicates that the FTSE 100 offers better value for money.
So, while in recent years the FTSE 100 has underperformed versus the DAX, Dow Jones and S&P 500, as of the present time it seems to be the best option for long-term investors who are seeking to find the best stocks at the lowest prices.
