Where’s the value in the FTSE 100 right now?

It’s a good idea to think about the unexpected happening before it happens, no matter how unlikely you think it might be. I wasn’t expecting a leave vote in the EU referendum and the result caught me out. So, there’s a lesson for me. Maybe complacency or over-confidence is the biggest risk an experienced investor needs to guard against.

Having now had several weeks to digest the outcome of the vote and witness the market’s response, I have to confess I’m far from confident about where the best value is in the FTSE 100 (INDEXFTSE: UKX) right now. Which sectors and stocks are set to reward investors, and which are set to disappoint? There seem to be conundrums wherever I look.

Bargain buys or value traps?

The shares of companies whose operations are focused on the UK were among the hardest hit in the aftermath of the referendum. Domestic banks, retailers, real estate firms and housebuilders all suffered badly, and continue to trade at depressed levels despite having recovered a bit since.

You don’t have to look far to find blue chip companies on price-to-earnings (P/E) ratios in the bargain basement of single-digits — for example Lloyds, Aviva and Barratt Developments — and many others in low-double-digits, including Marks & Spencer, Travis Perkins and Dixons Carphone.

Do these low P/Es and, in many cases high dividend yields, offer the ‘margin of safety’ value investors look for, or are earnings and payouts set to fall significantly, making these stocks value traps? It’s very difficult to know at this stage.

Should we simply turn our backs on these companies whose fortunes are highly sensitive to the UK economy, and look instead to defensive businesses and those with international earnings?

Too expensive?

At the same time as the Brexit vote hammered the shares of the most cyclical UK-focused companies, money poured into defensive domestic stocks. Just look at regulated water utility Severn Trent, and ‘quality’ multinational blue chips, including Unilever, British American Tobacco and Reckitt Benckiser.

The P/Es of such companies have reached historically high levels, and the conundrum for investors is whether these stocks are now simply too expensive. For example, Unilever trades on a forward P/E of 23.5, compared with the long-term average of 14 for the FTSE 100 as a whole. Is 23.5 too expensive? What is too expensive: 25, 30, 35? After all, top Footsie tech stock ARM has just been bid for at 48 times earnings by Japan’s SoftBank.

Holes in the ground?

The shares of oil companies and miners have been resurgent since January as oil and metals prices have staged something of a recovery. The likes of BP and Rio Tinto have extended their gains post-Brexit with sterling weakness attracting investors to London’s dollar earners.

But does BP, for example, merit a P/E of 28 at this point, when oil is below $50 a barrel and the duration of the supply/demand imbalance remains uncertain?

Brexit survivor's guide

The UK has made a momentous decision to leave the EU, and the ramifications will take a considerable time to play out. There are, as Donald Rumsfeld said in other circumstances, "known knowns, known unknowns and unknown unknowns".

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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended ARM Holdings, BP, Reckitt Benckiser, and Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.