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Identical to me, many would possibly marvel concerning the deserves of trying past the FTSE 100 to worldwide indexes such because the S&P 500.
Each include blue-chip corporations with engaging progress prospects. However as a cross-border investor, it may be laborious to match apples with apples. So right here’s why I favor the UK index to its bigger US counterpart proper now.
Focus
Let’s begin with measurement. The S&P 500 is big with a market cap of round $42trn (£32trn) immediately. As compared, the Footsie boasts a £2trn market cap. Regardless of this higher depth and breadth, I just like the smaller (however mighty) UK index for its diversification.
The ‘Magnificent 7’ shares inside the S&P 500 — Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla — comprise greater than a 3rd of the US index. Meaning massive swings in particular person corporations can shift the general market.
In contrast, the 4 largest Footsie constituents contribute 26.9% of the index with the biggest, AstraZeneca, accounting for 8.5%.
Financial backdrop
The second piece of the puzzle for me is the economic system and macroeconomic surroundings. The UK has a newly elected authorities with a pathway to make change based mostly on a landslide victory.
Inflation has cooled to 2.2%, virtually to the goal 2% degree, and rates of interest have begun to fall.
Within the US, it’s a special image. Geopolitical dangers stay heightened, and a few have argued the Fed is simply too late in chopping rates of interest.
Mix that with a hotly-contested election with divergent coverage views, and I feel I’m extra assured within the UK.
Valuations
Robust share worth progress, fuelled by the likes of Nvidia, has seen the price-to-earnings (P/E) ratio of the S&P 500 skyrocket. Actually, the US index at the moment has a P/E ratio of round 27.
With the Footsie boasting a P/E ratio of 15.3, I see the case for higher worth within the subsequent cycle. In fact, no investor would complain concerning the robust worth progress that has pushed US valuations larger.
What about revenue? The FTSE 100 dividend yield is sitting at 3.5% proper now in comparison with 1.3% for the S&P 500.
Evaluating corporations throughout borders is difficult. Tax, capital construction, investor base and general goals differ.
That stated, Tesco (LSE: TSCO) is one inventory that has caught my eye. The UK grocery large’s shares have gained 21.6% this yr to sit down at 356.5p as I write.
I like the expansion pathway for the corporate as a client staples enterprise, notably if customers begin to tighten their belts. On the valuation entrance, the corporate has a dividend yield of three.5% and a P/E ratio of 19.
There’s little doubt the grocery store enterprise is a difficult one typified by low margins, fierce competitors, and difficult provide chain and value administration.
Nonetheless, I feel I might use potential worth shares like Tesco in my portfolio earlier than trying additional overseas to the S&P 500.
Key takeaway
Each the US and UK have nice inventory indexes with high corporations. Given the challenges round cross-border investing, and a want checklist of Footsie shares once I get the money, I feel I’ll be investing within the UK for now.
