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Similar to me, many may surprise in regards to the deserves of wanting past the FTSE 100 to worldwide indexes such because the S&P 500.
Each include blue-chip firms with engaging progress prospects. However as a cross-border investor, it may be laborious to check 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 dimension. The S&P 500 is big with a market cap of round $42trn (£32trn) in the present day. Compared, the Footsie boasts a £2trn market cap. Regardless of this larger depth and breadth, I just like the smaller (however mighty) UK index for its diversification.
The ‘Magnificent 7’ shares throughout the S&P 500 — Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla — comprise greater than a 3rd of the US index. Meaning giant swings in particular person firms can shift the general market.
Against this, 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 setting. The UK has a newly elected authorities with a pathway to make change primarily based on a landslide victory.
Inflation has cooled to 2.2%, nearly to the goal 2% stage, and rates of interest have begun to fall.
Within the US, it’s a unique image. Geopolitical dangers stay heightened, and a few have argued the Fed is just too late in slicing rates of interest.
Mix that with a hotly-contested election with divergent coverage views, and I believe 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. In truth, the US index at present 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. After all, no investor would complain in regards to the robust worth progress that has pushed US valuations greater.
What about earnings? The FTSE 100 dividend yield is sitting at 3.5% proper now in comparison with 1.3% for the S&P 500.
Evaluating firms throughout borders is hard. Tax, capital construction, investor base and general aims differ.
That mentioned, Tesco (LSE: TSCO) is one inventory that has caught my eye. The UK grocery big’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 shopper staples enterprise, significantly if shoppers 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 question the grocery store enterprise is a difficult one typified by low margins, fierce competitors, and difficult provide chain and value administration.
Nevertheless, I believe I may use potential worth shares like Tesco in my portfolio earlier than wanting additional overseas to the S&P 500.
Key takeaway
Each the US and UK have nice inventory indexes with prime firms. Given the challenges round cross-border investing, and a want record of Footsie shares once I get the money, I believe I’ll be investing within the UK for now.
