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UK stocks are much cheaper than their US counterparts. So, as a UK investor, I see more and more the FTSE 350 and only looking at US-listed stocks in exceptional circumstances.
Let’s take a closer look at why I think this.
mighty dollar
Let’s start with something very simple. The dollar is very strong right now. Don’t get me wrong, it was stronger against the pound when Liz Truss’ disastrous budget sent sterling crashing. But in a broader context, the dollar is now strong against the British pound.
So what does this mean? Well, if an investor has dollars, he can buy more UK-listed shares with his money now than a year or two ago, simply because of currency fluctuations. The dollar is around 10% stronger against the pound today than it was a year ago.
For example, lloyds – one of my favorite stock picks – holds steady for 12 months. A year ago a share of the bank would have cost an American investor 67c, today it would cost them just 60c. That’s without any movement in the stock price.
The bottom line is that over the longer term, I see the pound appreciating against the dollar and moving in line with the longer-term averages. So even if the stock price remained stable, the dollar value of the investment would increase.
Valuation
The average price-earnings (P/E) ratio in the FTSE 100 is 14.2, while the average P/E in the S&P 500 it is around 21. Typically, a higher P/E ratio suggests that a company has greater growth prospects or is simply overvalued compared to its peers.
However, it is difficult to make direct comparisons in this way. After all, the US index is better populated with stocks that offer higher growth. Meanwhile, the FTSE 100 is more populated with resource stocks, which typically trade at lower P/Es, than technology, a typical growth stock.
But generally speaking, the US index seems to be a bit overpriced. And several forecasts suggest that the S&P could fall considerably this year.
One such forecast is from legendary British investor Jeremy Grantham. The co-founder of GMO, an investment management firm established in 1977, believes the S&P 500 will fall 16.7% by the end of the year. This reflects a real decline of 20% by 2023.
On the contrary, the The FTSE 100 could rise to 9,275 in July, according to the Economic Forecast Agency. That’s the high end of his forecast, but his median forecast for July is 8,750, up 12.5% from the current position.
Improving the UK outlook
Finally, we know that stock prices are depressed when the economic forecast is weak. And it’s certainly been the case that the UK’s forecast for 2023 hasn’t been good, especially compared to the US.
However, things are changing. It’s still not particularly rosy, and there will be continued pressure in sectors like homebuilding. But some analysts are now suggesting that the UK will avoid a recession this year. That’s a big change. And, in my opinion, it could improve. I hope the new Brexit deal in Northern Ireland will also unlock billions in investment.
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