In the 45 days between former UK Prime Minister Liz Truss being elected the new leader of the Conservative party and her subsequent resignation announcement, the FTSE 100 lost nearly 5% of its value.
Year-to-date, the 100 largest companies by market cap on the London Stock Exchange are down nearly 6%. Most of the losses came in the fall due to the now-former Prime Minister’s disastrous mini-budget that provided tax cuts of 45 billion British Pounds ($52.3 billion) for the country’s wealthiest individuals.
Recently, the UK markets have rallied on news that the other former Prime Minister, Boris Johnson, would not run to be head of the Conservative party and Prime Minister, putting Rishi Sunak in the job.
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The markets feel the former Goldman Sachs analyst is a better choice for the moment.
Despite the gains, the FTSE 100 is still down nearly 6% over the past five years. This compares to a 49% gain for the S&P 500. In addition, according to Bloomberg Intelligence, the FTSE 100 is trading at 8.7x earnings, its lowest multiple since 2011.
“It doesn’t just look cheap relative to its own history — it looks cheap relative to other markets too,” Bloomberg contributor John Stepek wrote on Oct. 24.
“In terms of valuation, the FTSE 100 trades at a discount of around 20% compared to euro-area stocks (as measured by the Stoxx 600 index), and a whopping 45% compared to the S&P 500.”
So the question is: Should U.S. investors be looking to the UK for their next stocks to buy?
Banks, builders healthcare, telecom look cheap
Stepek provides four industries where investors might look for beaten-down stocks that will rally in the future: asset management, homebuilders, healthcare, and telecoms.
However, as Stepek points out when stocks are cheap, they’re cheap for a reason and possibly could get even more affordable, so it makes sense to wait.
In addition, a big problem with the FTSE 100, according to Russ Mould, Investment Director of UK investment platform AJ Bell, is the type of companies included in the index.
“[The FTSE 100 earnings] are heavily reliant on the unforecastable (oils, mining, commodities), the indigestible (banks, life-and non-life insurers) and the interminably slow (telcos, utilities, tobacco),” the Financial Times reported Mould’s comments recently.
The Financial Times suggests that about 50% of the valuation discount for the FTSE 100 is due to poor sector composition. The other 50% valuation gap is attributed to the lengthy U.S. bull market and a higher cost of capital for UK companies due to Brexit.
For many global investors, equities of any kind remain unattractive, so even if the premise that UK stocks are cheap is accurate, there’s little appetite for buying right now.
For aggressive investors that want to take a chance on the UK market’s cheaper valuation, ETFs such as the Franklin FTSE United Kingdom ETF (FLGB) or the iShares MSCI United Kingdom ETF (EWU) might be the safer bet to make.
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