I read a piece in The Economist recently, looking at the low valuation of the UK stock market.
London just doesn’t seem able to attract big-name IPOs these days, and a lot of that is surely down to the relatively low valuations of UK stocks.
Look at the FTSE 100. The Economist reckons the top London index commands a price-to-earnings (P/E) ratio of only 10 right now.
Well below average
It’s way below its long-term average of closer to 15. And even that’s nowhere near the S&P 500, currently valued at 21 times earnings.
If you ran a company and were thinking of floating it on the stock market, which would you like better — a low UK valuation, or a high US valuation? I know which I’d prefer, to raise as much fresh capital as possible.
Market crash… or correction
At the same time though, there are plenty of headlines scaring us about the S&P crash they think’s on the way.
Someone a few months ago was shouting about a possible 60% crash in the S&P 500. I think there might be a correction coming, but surely nothing that dramatic?
Drop, what drop?
In November, analysts noted that the S&P was dropping in the latter half of the year. They also saw multiple factors, both domestic and international, that could send US stocks falling further.
But even in the few weeks since those fears were being raised, the S&P has headed back up again. It’s gained 17% in the past 12 months, compared to just 4% for our dear Footsie.
Maybe that’s because the US Federal Reserve is a lot more bullish about 2024 interest rate cuts than the Bank of England? Who knows?
What should we do?
Now on to the second part of my question. If the UK stock market looks like it’s set to remain perpetually undervalued, what should we do?
There’s not much point buying cheap shares in the hope they’ll rise if it looks like they might never do. But when share valuations are low, that can boost something else quite nicely — dividend yields.
So one possible approach does spring to mind. If we want to chase share price growth, go for exciting (and perhaps riskier) US stocks.
Buy for dividends
But if we want steady, progressive dividends with decent yields, stick with the plodding cash-cow that’s the UK stock market.
On that score, we’ve been enjoying a dividend bonanza for years. Forecasts suggest we could see almost as much paid out in FTSE 100 ordinary dividends in 2024 as in 2018. And that, remember, was before the pandemic.
What’s more, it looks like 2025 could smash the all-time record for dividend cash.
Cheap, so what?
For my money, London stocks being cheap compared to their US cousins is a cause for cheer. And I hope it stays that way.
It means I can buy larger chunks of top companies for less money. And, in that way, grab a bigger portion of their long-term dividends.
What’s not to like about that?
