Billionaire investor Warren Buffett has repeatedly warned, most recently in May 2020, “Never bet against America”. For much of history, this has certainly been good advice. But when I look at the US S&P 500 and the UK FTSE 100 today, I’m very tempted to back Britain, as well as betting on America. Here’s why.
The S&P 500 hits a record high
On Monday, the S&P 500 closed at a record high of nearly 3,916 points and currently hovers around 3,906. Since the 2008 meltdown, the index has gained in nine of the past 12 years, with just three modest down years. Over these 12 years, the index has more than quintupled, producing huge gains from the world’s biggest stock market. If only I could say the same for the FTSE 100, the S&P 500’s poor cousin.
The FTSE 100 is at 1999 levels
As I write, the FTSE 100 trades around 6,525 points, a level it first surpassed in late 1999. What’s more, the UK’s main index is over 1,350 points lower than — and more than a sixth (17.2{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b}) below — its record high above 7,877, hit in May 2018. Ouch.
To me, the S&P looks expensive and the Footsie cheap
As a value investor, I aim to buy into good businesses at reasonable valuations. For me, the FTSE 100 looks the better bet today — on basic fundamentals, at least.
Today, the S&P 500 trades on a forecast price-to-earnings ratio (PER) of 23 and an earnings yield of 4.3{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b}. It was more expensive than this in 2000 and 2007, but spectacular crashes followed. However, with near-zero interest rates and subdued inflation, this ratings expansion might be justified. Conversely, the FTSE 100 trades on a PER of 14 and an earnings yield of 7.1{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b}. Thus, buying 2021 earnings is much cheaper in the UK than the US. However, the American economy usually outperforms the UK’s, so this ratings gap might be rational.
A similar gap is seen with dividend yields. The S&P 500 has a current dividend yield of just 1.57{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b}, very close to the bottom end of its historical range. The FTSE 100 offers a forecast dividend yield of 3.8{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} — 2.42 times the US yield.
I could easily be wrong
Not for the first time, UK shares look cheap relative to US stocks and, on some measures, the difference is at a 50-year high. For income investors like me, rotating from US stocks into cheap UK shares looks tempting. But this switch has backfired many times before, as the S&P 500’s yearly returns have beaten the FTSE 100’s in almost every year since 2000.
Also, the FTSE 100 is very short on highly rated tech stocks and is packed with old-economy businesses. These include large oil & gas, mining, and financial companies. Also, the repercussions of Brexit and the EU/UK trade deal are unclear, which creates economic uncertainty. Likewise, Covid-19 mutations could prove disastrous for UK business and FTSE 100 earnings growth.
I’m into buying value, and UK shares look cheap on fundamentals to me. Even so, following Buffett’s wise advice, I’ll never bet against the US. Instead, I’m rebalancing my family portfolio by weighting it more to the FTSE 100. This should act as a counterweight to overpriced US stocks, some of which look very frothy. Finally, I don’t expect the FTSE 100 to shoot out the lights by massively outperforming the S&P 500. But a more value-orientated portfolio should help me to sleep better at night during market volatility!
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