In a turbulent stock market, UK shares have been faring better than their US counterparts. The FTSE 100 has fallen less than 1% over the last month, but the S&P 500‘s down almost 6%.
Warren Buffett says the first and second rules of investing is to avoid losing money. And the resilience of UK stocks makes them good candidates for investors looking to follow this advice.
Why are UK stocks so resilient?
As AJ Bell Investment director Russ Mould notes, there are a few reasons UK shares have held up well. The first is that they trade at lower price-to-earnings (P/E) ratios.
The S&P 500 trades at a forward (P/E) ratio of 23, compared to 12.5 for the FTSE 100. This can make US stocks vulnerable if earnings growth doesn’t materialise as investors expect.
Another reason is UK companies have more protection from the effects of a US recession. This is what’s been worrying investors lately, but the effects are naturally weaker on FTSE 100 stocks.
Lastly, UK shares simply haven’t done as well as US shares in the past. Over the last five years, the FTSE 100’s up 12% and the S&P 500’s up 82%, giving the UK index less by way of gains to give back.
A FTSE 100 fortress
I think these are all good reasons, but they don’t tell the full story. Diploma‘s (LSE:DPLM) a FTSE 100 growth stock that’s fallen 2% over the last month – far less than the S&P 500.
The stock isn’t exactly cheap – the current share price implies a P/E ratio well above the US average. So it’s not just that UK shares are resilient because they trade at lower multiples.
Equally, 45% of Diploma’s revenues come from the US. And as an industrial component distributor, it’s not exactly sheltered from the effects of an economic downturn across the Atlantic.
Furthermore, the stock has outpaced both the FTSE 100 and the S&P 500 over the last five years. Since 2019, the stock is up 178%.
Warren Buffett
To be clear, Buffett’s instruction isn’t to buy stocks that can never go down. That isn’t true of any equities, whether they’re listed in the UK, the US, or anywhere else.
Over time though, share prices tend to follow the performance of the underlying businesses. That means shares in strong companies do better than their more mediocre counterparts.
That means the real risk of losing money over the long term involves overpaying for stocks. And the chances of this are greater with shares that are expensive.
I’m not suggesting the risks Mould identifies with US shares don’t apply to Diploma – I think they do. But the FTSE 100 stock’s held up better than its S&P 500 counterparts over the last month.
Don’t lose money
I doubt there’s anything about being listed in the UK that makes shares resistant to downward pressure. Nonetheless, I do think the FTSE 100’s a good place to look for stocks to buy.
Not all UK shares are the same. But that means investors don’t necessarily have to choose between growth prospects and resilient share prices.
