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I have recently read many articles suggesting that the UK stock market is a dead end, backwater or graveyard for global investors. while the FTSE 100 contains many ‘old economy’ businesses, I largely disagree with this negative outlook.
In fact, when I look at UK large-cap stocks today, I see dozens of candidates for my family portfolio. To me, London-listed stocks seem unwanted, unwanted and unfairly cheap. One day, that could change.
What’s wrong with the FTSE 100?
One of the reasons the Footsie gets bad press is its long-term underperformance against the US. S&P 500 index. Here are the returns of both indices on five time scales:
| Index | FTSE 100 | S&P 500 |
| Three months | +0.6% | +4.7% |
| Six months | +12.4% | +14.4% |
| One year | +1.6% | -7.0% |
| Five years | +5.1% | +53.7% |
| Since April 13, 1984 | +585.6% | +2,509.5% |
During four of these five periods (except one year), the S&P 500 has outperformed the FTSE 100. Also, for the past 39 years, the US index has absolutely beaten its British cousin.
Let’s say I invested £1000 in the Footsie and the S&P 500 almost 40 years ago. Today my share in Footsie would be worth £6,856. Meanwhile, my US shares would be worth a whopping £26,095.
Clearly, I know what investment I would rather have made back then. But hindsight is a wonderful thing, while past performance is not a guide to future returns.
now two caveats
There are two main problems with my analysis above.
First, these returns ignore currency changes between the British pound and the US dollar. For example, in April 1984, the GBP-USD pair was around $1,424. Today, it is around $1,242.
In other words, the pound is worth less against the dollar today than it was 39 years ago. This makes my dollar investment in the S&P 500 worth about 14.7% more today in my local currency.
The second problem is that past returns exclude cash dividends. In the US, most companies view dividends as a poor use of their extra cash. Often American corporations prefer to reinvest their profits in future growth.
Meanwhile, reinvested dividends are a major component of UK stocks’ long-term returns. Today, the Footsie has a dividend yield of 3.7% per year, while the cash return for the S&P 500 is just 1.7% per year.
However, after adjusting for currency fluctuations and dividends, it’s clear that the S&P 500 has beaten the FTSE 100 for most of my investing life (starting in 1986).
Why not have both?
Today, US stocks account for more than half (58%) of the global stock market. Furthermore, with almost a quarter of the world’s output, the US economy is by far the largest. So I’d be crazy not to keep investing in the US, okay?
By comparison, the UK stock market is valued at less than £2.5 trillion, representing just 4.1% of total global equities today. At the end of 1999, this proportion was 9.4%.
Even so, I will continue to invest in undervalued and overlooked UK stocks, especially cheap FTSE 100 stocks. Why? Because the Footsie trades with a modest price-earnings ratio of 12.4 and a tasty 8.1% earnings yield. And as a lifelong bargain hunter, I love buying stocks and socks at discount prices!
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