When the UK electorate voted to leave the European Union in June 2016, my wife and I were heavily exposed to UK stocks, particularly FTSE 100 shares.
To me, it seemed clear the decision to leave the European Single Market would harm UK company earnings and profit margins. Therefore, following the Leave vote, we decided to move our liquid wealth into US stocks. That turned out to be a good decision.
The S&P 500 thrashes the FTSE 100
In late 2021, fearing a bubble in US stocks, my wife and I decided to reduce our heavy exposure to US stocks. Thus, we stopped putting money into the S&P 500 index and started building up a ‘war chest’ to buy cheap stocks when market sanity returned.
Hence, over the past 12 months, we have bought more and more undervalued FTSE 100 shares. But this decision hasn’t gone so well in our favour so far, as the following table reveals:
| Returns | FTSE 100 | S&P 500 | S&P 500 outperformance |
| One month | -2.4% | +5.6% | +8.0% |
| 2023 to date | +1.9% | +13.8% | +11.9% |
| Six months | +1.3% | +8.7% | +7.3% |
| One year | +5.7% | +16.5% | +10.8% |
| Five years | -0.5% | +57.1% | +57.7% |
My table shows that the FTSE 100 has produced minimal returns (or modest losses) over all five periods, ranging from one month to five years. Meanwhile, the mighty S&P 500 has generated positive returns over all five periods, including a gain above 57% over five years.
In short, anyone investing in large-cap US stocks since mid-2018 would almost certainly be far better off than those who bought UK shares.
This isn’t the Footsie’s only problem
To answer the question in my title, perhaps investors have gone off the FTSE 100 because it has lagged behind its US cousin for years? But I can think of two other reasons why global investors may have fallen out of love with UK stocks.
First, the UK stock market is shrinking. In April 2023, there were 1,926 companies listed in London. In January 2015, there were 2,429 London-listed firms, over a quarter (+26.1%) more. And who wants to invest in a seemingly shrinking market?
Also, the FTSE 100 is packed with what many investors classify as ‘old economy’ stocks. These include banks and insurers, mining companies, oil & gas producers, and tobacco firms. Some investors much prefer to buy booming US tech stocks and go-go growth companies over these British ‘dinosaurs’.
But UK shares look cheap to me…
For the record, the above figures exclude cash dividends, which are a much bigger component of returns for UK shares than US stocks.
Currently, the FTSE 100 has a cash yield of around 3.7% a year, which is over twice the 1.6% a year on offer from the S&P 500. As an older investor (I’m 55), I like collecting this passive income, which I can reinvest into more shares, or use to offset my ever-rising bills.
What’s more, the Footsie looks pretty cheap to me right now. It trades on a price-to-earnings ratio of around 10.4, for an earnings yield of 9.6%. The corresponding fundamentals for the S&P 500 are 19.1 and 5.2%, respectively. But perhaps that discount is justified, right?
Summing up, given the UK market’s hefty historical and geographical undervaluation, I will keep on buying unloved and unfashionable FTSE 100 shares!
This post was originally published on Motley Fool
