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The UK stock market has been overlooked by institutional investors in recent years. Perhaps that is not surprising given the FTSE 100 has followed the S&P 500 by a considerable margin over the last half decade. London’s flagship index returned 4.24% excluding dividends, compared with a 47% gain for its US counterpart.
However, with reasonable P/E and defensive stocks on offer, I think Footsie is the place to look for cheap stocks.
Here’s why I’m adopting a domestic bias in my 2023 investment strategy.
cheap appraisals
The forward P/E ratio for the FTSE 100 is 10.4, which compares favorably with that of the MSCI World Index at 14.6. In essence, this means UK large-cap stocks are trading at a 29% discount relative to the rest of the world.
Some names in Footsie look particularly cheap at present, with P/E ratios below 10.
Here are a handful of examples.
| FTSE 100 Stock Exchange | P/E Ratio | Stock price performance in 12 months |
|---|---|---|
| fan | 9.39 | -twenty% |
| barclays | 6.04 | -9% |
| glencore | 5.74 | +37% |
| red river | 8.24 | +12% |
| Shell | 5.17 | +24% |
The P/E ratio is a useful tool. It offers investors a way to identify investment opportunities in bargains and undervalued companies.
However, he has shortcomings, and I don’t trust him alone. For example, it doesn’t give much indication of a company’s earnings-per-share growth prospects or balance sheet debt.
Nonetheless, it remains one of the most popular ways to measure value investing prospects and, at least by this benchmark, many UK stocks currently look very cheap.
defensive actions
Another reason I like FTSE 100 stocks is their defensive credentials. Many Footsie companies have relatively stable profits whether the economy is firing on all cylinders or in a recession.
For example, pharmaceutical stocks like AstraZeneca benefit from robust and non-cyclical demand for medicines. At the other end of the spectrum, tobacco giants like british american tobacco they are also defensive due to their strong pricing power in times of high inflation.
There is a risk that the share prices of defensive stocks may underperform during an ‘active risk’ environment where growth stocks tend to underperform. However, a global recession is a real possibility in 2023. Against this backdrop, I want to increase my exposure to defensive investing.
dividends
Finally, the FTSE 100 has a lot to offer passive income seekers. The index has an average return of 3.54%. Compare this to the 1.67% return of the S&P 500 and the Footsie seems like the obvious choice for dividend investors.
High-yielding dividend stocks in the index include the likes of investment manager M&G with an annual return of 8.84% and mining company Anglo-Americanwhich sports a yield of 5.67%.
There is always a risk that companies will reduce or suspend dividend payments. That being said, I think UK stocks are great investments for me as I strive to earn a second income from the stock market.
My FTSE 100 portfolio
I already own several shares of the FTSE 100, but I want to expand my holdings in the UK this year. The combination of cheap valuations, defensive qualities and attractive dividend yields is too good to miss.
Although not without risk, Footsie shares will occupy the top position in my investment strategy for 2023.
