The UK stock market has been rather overlooked by institutional investors in recent years. Perhaps that’s unsurprising given the FTSE 100 has trailed the S&P 500 by a considerable margin over the past half-decade. London’s flagship index returned 4.24% excluding dividends, compared to a 47% gain posted by its US counterpart.
However, with reasonable price-to-earnings (P/E) ratios and defensive stocks on offer, I think the Footsie is the place to look for cheap equities.
Here’s why I’m adopting some home bias in my investing strategy for 2023.
Cheap valuations
The FTSE 100’s forward P/E ratio is 10.4, which compares favourably to that of the MSCI World Index at 14.6. In essence, this means UK large-cap stocks trade at a 29% discount relative to the rest of the world.
Some names in the Footsie look particularly cheap at present, with P/E ratios under 10.
Here’s a handful of examples.
| FTSE 100 stock | P/E ratio | 12-month share price performance |
|---|---|---|
| Aviva | 9.39 | -20% |
| Barclays | 6.04 | -9% |
| Glencore | 5.74 | +37% |
| Rio Tinto | 8.24 | +12% |
| Shell | 5.17 | +24% |
The P/E ratio is a useful tool. It offers investors a way to identify bargain investment opportunities and undervalued companies.
However, it does have deficiencies, and I don’t rely on it alone. For instance, it doesn’t give much indication about a company’s prospects for growth in earnings per share or any information about debt on the balance sheet.
Nonetheless, it remains one of the most popular ways to gauge value investment prospects — and, by this benchmark at least, many UK shares look dirt-cheap currently.
Defensive stocks
Another reason I like FTSE 100 shares are their defensive credentials. Many Footsie companies have relatively stable earnings whether the economy’s firing on all cylinders or in a downturn.
For example, pharmaceutical stocks such as AstraZeneca benefit from robust, non-cyclical demand for medicines. At the other end of the spectrum, tobacco giants like British American Tobacco are also defensive due to their strong pricing power in times of high inflation.
There’s a risk the share prices of defensive stocks can underperform during a ‘risk-on’ environment where growth stocks tend to do better. However, a global recession is a real possibility in 2023. In this context, I want to boost my exposure to defensive investments.
Dividends
Finally, the FTSE 100 has a great deal to offer passive income seekers. The index has an average yield of 3.54%. Compare this to the 1.67% yield of the S&P 500 and the Footsie looks like the no-brainer choice for dividend investors.
High-yield dividend stocks in the index include the likes of investment manager M&G with an 8.84% annual yield and mining company Anglo American, which sports a 5.67% yield.
There’s always a risk that firms might cut or suspend dividend payments. That being said, I think UK shares are great investments for me as I strive to earn a second income from the stock market.
My FTSE 100 portfolio
I already own a number of FTSE 100 stocks, but I want to expand my UK holdings this year. The combination of cheap valuations, defensive qualities, and attractive dividend yields is too good to miss.
While not without risks, Footsie stocks will take pole position in my investing strategy for 2023.
