3 months ago • 2 mins
The UK stock market’s eating lunch alone these days, but there’s one plus side of not being popular: it’s going for cheap. The price-to-earnings (P/E) ratio of the country’s FTSE 350 is at a decade low, while the S&P 500 is trading at close to double the price of UK stocks. Punters are pulling out their “Buy the dip!” placards, sure, but let’s see if this is a bargain worth buying.
The valuation gap between UK and US stocks widened significantly after Brexit. Before then, FTSE 350 stocks were broadly equally valued to US shares. Investors doubted the UK’s ability to keep up its pace after leaving the European Union, so for the country to really come back, investors need to be reassured that British firms have a strong future.
Now, commodity and financial companies make up a major part of the UK stock market, and these sectors tend to be more volatile. They perform best when global growth is strong or just starting to rebound. Plus, they tend to trade at a lower valuation compared to the high-growth tech stocks that make up the majority of the US market. So unless the economy turns and these sectors fall into favor again, that valuation gap could stick around. Here’s a tip: to understand a market’s composition, find the corresponding market ETF and look at its sector breakdown.
To assess potential, you’ll want to identify near and long-term market catalysts. Take currency for an example. A weak sterling (against major currencies like the euro or dollar) is often a short-term positive catalyst for the FTSE 100 returns. The index holds 100 of the UK’s biggest companies, and because close to 70% of those firms’ sales are international, they benefit from a weaker exchange rate. Longer-term catalysts can include corporate reforms like we’ve seen in Japan, trade deals, or government policies.
If you think the tide could turn for the UK, remember that you don’t have to buy the entire market. The UK stock market has more breadth than the US one, meaning a wider variety of sectors and stocks drive its returns. So you don’t have to wait for the whole country to get more popular: you can always pick out the specific sectors you fancy.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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