So far this month we have already seen the FTSE 100 hit a new all-time high, moving past the 10,000 mark for the first time in its history. Should that set alarm bells ringing? After all, the British economy is not exactly on fire, yet the leading index of blue-chip London-listed shares is going gangbusters.
I continue to think there is potentially good value in both the FTSE 100 and FTSE 250 index. I have already bought some FTSE shares for my Self-Invested Personal Pension (SIPP) this year – here is why I think this market can still offer opportunities for buyers.
Relatively attractive valuation
It is easy to look at how well the FTSE 100 has done in recent years and draw a link to it being potentially overvalued. But how well (or poorly) an index performs does not in itself speak to its valuation.
For me, valuation boils down to a simple question of whether I am getting something for less than I think it is worth over the long term, adjusted for the cost of me tying my money up in it. If I am, then I regard it as attractively valued.
The FTSE 100 is cheaper than its US counterpart. I see many UK shares as attractively valued compared to some US ones. But I also see many UK shares as attractively valued on an objective basis – that is, compared to what I believe they are worth.
Taking the long-term view
In part, that reflects my long-term approach to investing. Most shares go up and down. Over time, even a good share may have some big jumps between highs and lows.
That might seem concerning. But I take the long view and focus on whether I think a share is worth more than its current price suggests. Doing that lets me ignore many short-term price movements, or sometimes use them to my advantage to buy a share that I think has an unjustifiably low share price.
For example, over the past year I have been stocking up on FTSE 250 baker Greggs (LSE: GRG). So far, the investment has not performed well. Most of the shares are sitting below the price paid for them, so I am holding what is known as a paper loss.
There is some compensation thanks to a dividend yield above the FTSE 250 yield, but the price action has not been promising.
Why has this happened? Many investors have turned more negative on Greggs, due to risks such as market saturation and the hit to profit margins from higher wage and National Insurance costs.
I see those risks as real — and ongoing. But I also see lots to like about Greggs: its proven business model, unique brand positioning on the high street, large economies of scale and ongoing profitability.
I am hoping that, over the long term, quality will out.
A balanced view
Another reason I continue to invest in FTSE shares is that they give me exposure to both the UK and global economy.
The shares are all London-listed, but FTSE 100 companies make over half their profits overseas. These are proven businesses operating in multiple areas of the world economy.
Over time, I believe being exposed to such businesses can help me benefit from global economic growth.
