My Stocks and Shares ISA mainly comprises UK stocks, some of which are members of the FTSE 100.
I’m a risk-averse investor and prefer owning stakes in solid companies that pay generous dividends. But recent global events have taken their toll. And our domestic economy appears to be suffering more than most which isn’t helping investor confidence.
Despite this, I remain optimistic that the value of my ISA will recover over the coming months.
Here are my three reasons to be positive.
1. The UK stock market offers good value
More experienced investors are familiar with the concept of the price-to-earnings (P/E) ratio. By comparing the market cap of a company to its earnings, it’s possible to make a quick judgement as to whether an individual stock is undervalued.
Applying the same logic to the UK stock market as a whole suggests that it currently offers good value.
The table below compares the cyclically adjusted P/E (CAPE) ratio for the UK with other global markets. This measure removes inflation from average earnings over the past 10 years, to eliminate the possibility of an exceptionally good (or bad) year distorting the figures.
A more conventional forward-looking calculation is also included.
| Market | CAPE | Forward P/E |
| US | 28 | 22 |
| Europe (excluding UK) | 19 | 15 |
| Japan | 18 | 17 |
| UK | 14 | 12 |
On both metrics, the UK appears to be the cheapest.
Some of the differential can be explained by other markets, particularly the US, having more tech companies, which generally attract higher earnings multiples.
But for the UK stock market to have a CAPE identical to that of Europe — which seems reasonable to me — it would have to increase in value by around £1.4trn (43%).
2. The FTSE 100 has underperformed
Since the start of 2023, the FTSE 100 has underperformed many major indexes.
| Index | Performance since 31 December 2022 (%) |
| Nikkei 225 (Japan) | +29.6 |
| S&P 500 (US) | +16.5 |
| DAX (Germany) | +13.2 |
| CAC40 (France) | +11.0 |
| FTSE 100 | -1.0 |
Although past performance isn’t necessarily a good guide to the future, this implies the Footsie has the potential to increase more from its current levels than others.
It’s possible that new money could come from the country’s pension funds. The government is looking at ways to encourage the £3.5trn industry to invest more in UK equities. In 2000, the proportion of assets invested was 50% — it’s now around 10%.
3. Things can only get better
I think we are now at — or close to — ‘peak gloom’.
Although many were surprised when inflation remained unchanged last month, most economists are forecasting that it will drop sharply over the remainder of 2023.
And although further interest rate increases are likely, I don’t think they will rise by much more.
The yield on two-year government bonds is currently around 5.3% — 0.3 percentage points higher than the base rate. I therefore think one more modest increase will end the current cycle of rate rises.
Also, according to the OECD, the UK economy will grow by 1% next year. Although unspectacular, it’s not far behind the average of 1.4%. Most economists are predicting a return to historical levels of growth in 2025.
Reasons to be cheerful
For these reasons, I remain optimistic that the value of my ISA will increase over the next few months.
Whatever happens, I can take some comfort that most of my shareholdings are in companies that continue to pay above-average dividends. By reinvesting these, I’m hoping to improve the long-term growth rate of my portfolio, which is the only measure that really matters.
