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FTSE 100 Stocks have been on quite a run of late, with the index recently hitting a record high of 8,000. Does this make them too expensive to buy today?
Apparently, some investors think so, as the index has flattened and declined since it broke that barrier. However, I’d say this is due to events elsewhere, rather than a problem with the index itself.
I’m looking for bargain stocks
Global investors have spooked at the thought that the US Federal Reserve will raise interest rates more than expected and keep them there for longer. We may have to wait for the legendary “pivot” when the Fed starts cutting instead of raising. That thought was enough to bring the recent rally to a sudden halt.
If investors have stopped buying FTSE 100 shares because they think they are too expensive, I think they are making a mistake. By conventional metrics, they’re nothing of the sort, according to figures provided to me by investment platform Bestinvest.
Its managing director, Jason Hollands, says the FTSE 100 may be at an all-time high, but that tells us nothing about valuations. A better measure is the relationship between stock prices and expected earnings, and based on this metric, the index remains “convincingly cheap”.
The FTSE 100 is currently trading at just 10.7 times forecast earnings. This is well below its long-term average price-earnings (P/E) ratio, which is closer to 16x.
It’s even cheaper when compared to the rest of the world, which is trading at 15.7 times earnings, Hollands says. That’s a 32% discount, which is “the widest in decades”.
Many investors underestimate the FTSE 100 because they assume it is facing the same problems as the UK economy. However, this is not a national index, but an international one, with listed companies generating almost 80% of their revenue outside of the UK. It has more exposure to the US and Asia than our own troubled island.
It is also a Chinese market.
The FTSE 100 should get a boost from China’s post-COVID-19 reopening, as UK large-cap stocks generate a staggering 13% of their combined revenue in China.
The big draw to the FTSE 100 is the generous dividend income it offers investors. Its forward dividend yield is currently 4.0% per annum, which is at the high end among major markets and compares to 2.3% for global stocks. It also has a useful premium compared to the current yield of 3.4% on 10-year gilts.
Hollands shares my view that the sector composition of the UK market is attractive in today’s uncertain world, given its heavy weighting in commodities and energy, as well as defensive sectors such as consumer staples and healthcare. .
When the economy is in trouble, consumers are unlikely to stop taking their tablets or buying bleach, toothpaste, soap, beer and cigarettes.
I am on the hunt for FTSE 100 shares, while avoiding any that have risen too fast in the recent rally, just to be safe. A good number of major stocks are still trading in P/E in the single digits, including barclays, BT group, glencore, worldsand red river, and that’s where I’m starting my search. I will buy more of them in March.
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