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As of July 2023, there were 1,900 companies listed on the London Stock Exchange. The 100 largest by market value are members of the elite FTSE 100 ('Footsie'), known as blue chip stocks. The next 250 companies by size constitute mid-cap. FTSE 250 index.
Together, these two indices constitute the FTSE 350 index. And these FTSE 350 companies plus a few hundred smaller companies make up the FTSE All-Share Index. There we have it: the London stock market in a nutshell.
What London looks like on the list
Right now, the Footsie's total market capitalization is £1.84 billion, roughly 6.5 times the £284 billion the mid-cap index is worth. Meanwhile, the FTSE All-Share weighs in at around £2.17bn, adding a further £47bn of small business market value to the FTSE 350.
In other words, blue-chip stocks account for around 84.8% of the total London market valuation. This is why these big players usually attract most of the media coverage of the UK market and its movements.
As far as I'm concerned, I've often found that when it comes to buying shares in a company, big is beautiful. That's why my family portfolio includes 15 Footsie shares and seven US megacap shares, but only five FTSE 250 holdings.
UK shares are very cheap
writing in Bloomberg Today (Tuesday 5 December), John Stepek makes some compelling arguments as to why UK shares are remarkably cheap, and especially mid-cap shares.
This is something I've said since late 2021, but little has changed. FTSE shares started this year cheap and are ending even cheaper. This is despite the British economy avoiding a recession, something economists and experts widely predicted 12 months ago.
Citing Simon French of British investment bank Panmure Gordon, Stepek explains that London stocks have suffered a structural “equity discount” since the Brexit vote in mid-2016. As a result, in relative, absolute and historical terms, UK shares look cheap.
In fact, the London market “It currently trades near the end of its 30-year range based on price/earnings, enterprise value/EBITDA, and price/book ratios.”as Stepek and French explain.
Furthermore, London's earnings multiple is 10.7, compared to 15.4 for the rest of the world: a discount of 30.5%. In another earnings rating known as EV/EBITDA, the UK's 7.3 versus 10.2 produces a 28.4% discount. And London's price-to-book ratio of 0.8 is less than a third of the rest of the world's ratio of 2.5.
I'm still overlooking the FTSE 250
One reason some global investors avoid the Footsie is that it is full of “boring, old-world, old-school” businesses in sectors such as mining, oil and gas, banking and insurance, consumer goods and telecommunications.
Still, I can't help but feel like I've missed out by overlooking the deep value hidden within the mid-cap index. For value investors like me, the FTSE 250 looks like a bargain bin of undervalued, overlooked and underappreciated stocks.
Finally, Stepek adds that the median holding of large caps in the UK is currently valued in the 40th percentile, below the average of 50 over the past 20 years. Meanwhile, the median share of midcaps is in the 21st percentile, which is incredibly cheap.
In short, as a hardcore value investor, I find the mid-cap index to be a great bargain. Therefore, my aim is to invest in a simple and cheap FTSE 250 tracking fund in 2024.
