The FTSE 100 index isn’t broken. It’s just undervalued!
Over the past fortnight, I’ve read many articles arguing that the UK stock market is a busted flush. However, as a natural contrarian who tends to go against the herd, I welcome this doom and gloom. Experience has taught me that when fear, uncertainty and doubt rule financial markets, brilliant bargains can be had — often hidden in the elite FTSE 100 index, aka the Footsie.
Global stock markets crash
After the global financial crisis of 2007-09, stock markets rebounded strongly. And the US was the best-performing major market, with the S&P 500 and Nasdaq Composite indices both soaring from 2009 to 2021.
Towards end-2021, I repeatedly warned that US shares — and tech stocks in particular — were leading an ‘everything bubble’. Sure enough, US share prices crashed in 2022, with both major indices entering bear markets (by crashing by 20%+).
Meanwhile, I kept arguing that UK shares — especially FTSE 100 stocks — were incredibly cheap, both in historic and geographical terms. Hence, my wife and I eagerly bought various undervalued FTSE 100 and mid-cap FTSE 250 shares last year.
Crash, what crash?
Here’s how the FTSE 100, FTSE 250 and wider FTSE All-Share indices have fared over three timescales:
By the way, we add the FTSE 100 to the FTSE 250 to get the FTSE 350, while the FTSE 350 plus 230 smaller companies make up the FTSE All-Share index’s 580 companies. And looking solely at the Footsie, it’s like 2019-22’s huge market movements didn’t happen here in the UK.
The FTSE 100 drives London
Of course, the FTSE 100 index massively dominates the London stock market. Here are these three indices’ respective market values:
While the Footsie is worth over £2trn, the FTSE 250 is worth just £335bn. Meanwhile, the total value of the remaining 230 companies in the FTSE All-Share is a mere £58bn. That comes to just 2.4% of the FTSE All-Share’s value.
In short, the FTSE 100 drives the wider valuation of the London market. And, to me, the Footsie is doing just fine, thank you.
These returns exclude cash dividends
As a value investor, I’m a big fan of cash dividends, which account for a large proportion of long-term UK investing returns. Also, the FTSE 100 offers a much higher dividend yield than other major market indices. Indeed, cash dividends might add as much as 4% a year to the above-quoted returns.
Right now, I’m happy to keep buying the London stock market’s unloved, unwanted and undervalued shares. After all, FTSE 100 firms make over 70% of their revenues overseas, so I’m effectively buying into the global economy at a sizeable discount.
Finally, I still see deep value hidden in some of the most boring, old-school London-listed companies. These include high-yielding asset management and insurance, banking, oil and gas, mining, and telecoms stocks. All of these took a beating this week. Therefore, while the rest of the world turns its back on cheap UK shares, I’ll happily keep buying more!
The post The FTSE 100 index isn’t broken. It’s just undervalued! appeared first on The Motley Fool UK.
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Motley Fool UK 2023