A strange thing happened for investors recently: as stock markets took a hammering UK shares did better than their US cousins.
While the US’s two main stock market indices, the S&P 500 and Dow Jones IA, fell 9.5 per cent and 6.5 per cent from their peaks earlier this month to low points this week, Britain’s FTSE 100 dropped 4 per cent.
The past two days have seen a bit of a bounce back for shares, but the UK stock market is once again faring better: the FTSE 100 has trimmed losses from its peak to 1.8 per cent, whereas the Dow remains 5.4 per cent down and the S&P 500 is 8.2 per cent off.
This is but a brief moment in market time, but for investors used to the UK being a perennial laggard, it’s a bit of a turn-up.
The FTSE 100 held up better in the recent stock market wobble than its US peers
So, what’s going on?
Every stock market wobble needs its narrative and this time round it’s tensions between Russia and the Ukraine, and the Federal Reserve’s supposed renewed fervour for raising interest rates and pulling the punchbowl away, that are said to be spooking investors.
These are certainly elements at play in the switch to being a bit more risk off, but the narrative can also be as simple as things that go up can come down.
And going up has been the defining characteristic of the high-flying US stock market for a long time now, which in particular applies to some elements of it.
Stratospheric share price rises mean we live in an investing world where Tesla’s market cap is equivalent to the value of the next nine biggest car makers’ combined, a list that includes Toyota, VW Group, Daimler (aka Mercedes Benz), Ford, and BMW.
The world’s biggest company Apple has a market cap of $2.7trillion – similar to the entire FTSE 100 index combined.
Meanwhile, Rivian, an electric truck maker that had only made about 1,000 trucks ever by the end of 2021 and whose shares have slid 60 per cent from their high, still has a paper value of $56billion – bigger than Honda and a notch under the Stellantis conglomerate.
Don’t look up: Tesla is the world’s biggest car company by market cap – and its shares have risen by so much that it’s larger than the nine next biggest car companies’ combined value
Snapshots like that may not necessarily trouble you if you subscribe to the investing philosophy of looking for disruptive companies offering the potential for explosive growth.
This could be called the Scottish Mortgage way of thinking, if you like, after the trust that has shown the way in ambitious but careful and informed selective stock-picking, to build a broad portfolio where the winners do so well that the losers pale into insignificance.
But looked at overall, can the market continue to favour this kind of story indefinitely?
The easy trade of the past decade has been to buy the US market and ride its exposure to the best and most extreme of the growth share wave.
There have plenty of high achieving story stocks along the way, but much of the super returns from US market come from a small bunch of companies.
I asked Schroders Strategic Research Unit to have a look at this and its strategist Sean Markowitz said the five FAMAG stocks (Facebook, Amazon, Microsoft, Apple and Google) had delivered 21 per cent of the S&P 500’s overall return over the past decade.
A basket of those five stocks alone rose by 1,073 per cent in the ten years to the end of 2021, whereas the rest of the S&P 500 was up 287 per cent.
The diluting effect of putting the FAMAG five into a 500 company-strong index, means the S&P 500’s overall return was 387 per cent over the decade.
Betting against the US growth trend has not proved overly profitable for investors in recent times, despite endless claims that the rotation to value was beginning (usually followed by a swift rotation back to growth).
Betting against the US growth trend has not proved overly profitable for investors in recent times
Arguably, now we are in different circumstances: the pandemic disruption, supply chain crunch, and a soured relationship between the US, the West and China, are colliding with the distortion of even further through the looking glass monetary policy and stimulus.
This is manifesting itself in a wave of inflation that makes things feel unlike the post-financial crisis years.
And that means investors might be looking for something different. Instead of what’s been characterised as risk-on / risk-off trading behaviour, there is a potential shift to other investments.
Investors are still hungry for returns, there’s pots of cash sloshing about, and economies – for all their cost of living crisis problems – are rebounding from Covid restrictions.
And this is where the UK comes in: our stock market has been considered deeply unloved and old hat for some time but there’s still a lot of good companies in it that are often cheaper than some international peers.
It’s not just the headline-dominating FTSE 100 that should be looked to here, but also the FTSE 250 and below that smaller companies.
The catalyst that’s needed for UK shares to pick up is for big investors to sit up and take notice and shift their sentiment. JP Morgan and Morgan Stanley did that this week with positive notes on buying the ‘exceptionally cheap’ and ‘more defensive’ UK.
That doesn’t mean a revival will happen, we’ve had plenty of false dawns before, but you might want to look at whether a UK tilt to your portfolio could prove profitable for the year ahead.
Which markets look good value?
The Schroders Strategic Research Unit, mentioned above, regularly looks at market valuations and how they compare.
This chart from Schroders uses a composite valuation measure to compare major markets. The UK and Japan (green and purple) are back to fair value but not cheap
Duncan Lamont, the head of the unit, said they had recently looked a composite valuation measure – as show in the chart above – and that on this basis the UK and Japan looked to have returned to being fairly valued.
Emerging markets have also got much cheaper last year, influenced by the fall in Chinese stocks.
Investors should be aware that just because a market looks better value, it is not guaranteed to do better. The US stock market has been expensive on many measures for years and regularly led the way on performance.
No bargains: This table shows the different valuation measures used by Schroders and how they compare to 15-year averages for the market. The UK, Japan and Emerging Markets look cheaper than the US and Europe
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