Last week was a great one for stocks, with both UK and US market indices gaining over the past five days. The US S&P 500 index had its best week since late June, rising almost 2%. Here in the UK, the FTSE 100 also gained nearly 2%.
The FTSE 100 hits its 2021 high
Notably, the FTSE 100 hit its 2021 intra-day high of 7,243.85 points on Friday, before closing at 7,234.03. However, the index is still almost 670 points (8.5%) below its all-time intra-day high of 7,903.50 on 22 May 2018.
In 2021 so far, the Footsie is up by 12%. Also, the UK’s main stock-market index has risen by almost a quarter (+22.2%) over the past 12 months. So, is it time for me to sell up and move on? Or could there be more gains to come from UK shares?
I still see UK shares as cheap
When I look at the UK stock market today (especially FTSE 100 stocks), I see plenty of value left in the tank. In both historical and geographical terms, the Footsie is far from expensive. In fact, in today’s era of near-zero and negative interest rates, I regard London stocks as among the cheapest assets around.
Over the past five years, the FTSE 100 index has risen by just 3% (excluding dividends). Meanwhile, the S&P 500 has more than doubled, soaring by 108.8% since late October 2016. Of course, some of this underperformance can be attributed to Brexit. The UK’s vote to leave the European Union in June 2016 spooked many global investors. Expecting disruption to the UK economy, many reduced their exposure to UK stocks.
In addition, Covid-19 has hit the country particularly hard, leaving international investors questioning our government’s competence. Hence, it’s no surprise to me that global portfolios are less exposed to London-listed shares nowadays. But doesn’t that just leave more bargains for veteran value investors like me?
I’ll keep buying London stocks
For me, what matters most is the the relative valuation of the UK market, rather than its absolute levels. I’m not concerned whether the FTSE 100 is at 7,000, 8,000 or 9,000 points. All that matters is how highly rated the London market is and how high its earnings yield is. And I’m very much drawn to the Footsie’s above-average passive income in the form of cash dividends.
Right now, the FTSE 100 trades on a modest price-to-earnings ratio of around 15 and an earnings yield of 6.7%. Compare this to the S&P 500, where these figures are 30.5 and 3.3% respectively. What this suggests is that UK shares are half as expensive as US stocks. That said, the latter have a much stronger history of growing earnings, so this comparison is not quite as clear cut as it seems.
But for income, I find it hard to beat FTSE 100 dividends. The Footsie has a forecast dividend yield of 4.1% for 2021, versus a mere 1.3% for the S&P 500. Like John D Rockefeller, I love collecting dividends to spend or reinvest by buying more shares. That’s why, for now, I will keep buying cheap UK shares instead of US stocks. Of course, the world is still full of worries. As well as fighting off Covid-19, we have soaring price and wage inflation, surging energy prices, and supply-chain bottlenecks. Even so, TINA (There Is No alternative) tells me to keep buying cheap UK shares!
