The financial press has been rather bullish of late. Here’s the Financial Times from 15 March, for instance:
“Stock markets around the world have hit record highs this year as investors become increasingly confident that central banks have succeeded in taming inflation without triggering a downturn.”
America’s Dow Jones Industrial Average, to choose one example, closed at 39,131 on 23 February — an all-time high. It’s slightly below that now, closing at 38,714 on 15 March — but on a five-year chart, you have to look closely to see the wobble.
How about the more representative S&P 500 — America’s five hundred largest publicly traded companies? Yet another all-time high: 5,175 on 12 March. The tech-heavy Nasdaq? Same story — with the added fillip of the impact of artificial intelligence adding to the froth.
Global euphoria
It’s the same elsewhere. Japan’s Nikkei 225 has finally — 33 years on — beaten the market bubble of 1989, to reach its own all-time high. The EuroStoxx 50? Another all-time high. Germany’s DAX? Yes, you guessed it: yet another all-time high.
And so on, and so on. Among the major markets of the world, only Hong Kong’s Hang Seng and our very own FTSE 100 buck the trend.
The Footsie, in fact, peaked at 8,004 on 17 February 2023 — i.e. just over a year ago — and has oscillated lower ever since. On its most recent dip, in the autumn, it reached as low as 7,291.
And needless to say, lots of investors feel that they’re missing out.
Chatting to a few investors in my social circle, I’m hearing of money being pulled out of London, and invested in the S&P 500 — generally in the form of ETFs, but sometimes with a few tech giants added to the mix.
London, they say, doesn’t look attractive.
Sizeable disparities
And on the face of it, they have a point.
Over five years, the Dow Jones has risen 52.2%. The S&P 500, 82.7%. Nasdaq, 108.9%.
London’s Footsie? A rather more modest 7.2%.
Switching from London to New York is a no-brainer, you might think. As with that famous movie scene in When Harry Met Sally, you’ll have some of what they’re having.
But that is to miss two rather central points.
Think before you leap
First, these are markets that are at all-time highs. Is now really the time to buy into them? It’s tempting to not want to miss the boat, of course. Momentum could very well carry things higher — and probably will, in fact.
But even so, an all-time high is an all-time high. It certainly doesn’t scream ‘bargain’.
And relative valuations tell the same story. America’s Dow Jones and S&P 500 indices have price-to-earnings ratios in the low twenties. London’s Footsie and FTSE-All Share? Less than half that.
In short, in valuation terms, America is twice as expensive as the UK.
Warren Buffett’s hamburger analogy
As usual, investing legend Warren Buffett puts it well.
“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?”
As he points out, these questions answer themselves. But now ask the question again, but in the context of stock markets and share prices:
“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?”
Again, the question pretty much answers itself. So why do so many investors cheer when their portfolios reach new highs, propelled by soaring stock markets — making future share purchases more expensive?
Don’t look there, look here
The moral is clear. Tears shed mourning the Footsie’s lacklustre performance miss the point. Relative to the American markets — and relative to many others, too — the Footsie and FTSE All-Share indices are cheap.
If you’re hunting for bargains, you’re more likely to find them in London, than New York.
