The FTSE 100 has outperformed the S&P 500 this year. Can it last?
Since the start of the year, the S&P 500 is up a measly 2%. By contrast, our own FTSE 100 index of leading shares has moved up by 7% during the same period.
That may be surprising, given how often we hear about the US market performing strongly, while the London exchange feels neglected. Indeed, just this month London-listed fintech Wise announced plans to shift its primary stock market listing to the other side of the pond.
So, ought I to keep on looking for cheap FTSE 100 shares to buy? Or could now be the moment to shift my focus to S&P 500 stocks?
UK market still looks attractively valued
There has long been a valuation gap between New York and London.
Even after the rise seen in the FTSE 100 over recent months, its average price-to-earnings ratio is around 13. Compare that to the equivalent figure for the S&P 500 – 29 — and the London market may seem to be massively undervalued in comparison.
In reality, things may be more nuanced. For one thing, the indexes contain different shares. The S&P 500 contains fast-growing tech giants like Nvidia, which may attract a racier valuation than FTSE 100 constituents with weaker growth prospects.
Another thing for an investor to consider is whether the valuation gap may be justified and sustainable. London has less liquidity than New York and its companies have long suffered weaker valuations than Stateside peers. As an investor, I quite like that: it helps me pick up bargains. But it helps to remember that, just because something looks undervalued, does not necessarily mean that it will be fairly valued soon (or ever).
Sticking to what I know
Warren Buffett always emphasizes the importance of investors sticking to what they understand. Putting money into something you do not understand is not investment, but mere speculation.
As investors, we tend to have some home turf advantage when it comes to assessing companies. I can more easily pop into a Tesco or J Sainsbury to get a feel for the business, than an S&P 500 equivalent like Walmart or Dollar General.
That does not mean I never invest in US companies. After all, information is widely available nowadays. But I do think it can be easier for a UK-based investor to spot opportunities in their home market than an overseas one, without putting in more legwork.
One UK share I’m excited about
An example is JD Sports (LSE: JD). One of its key suppliers is Nike. The S&P 500 footwear maker has had a tough time lately, with its stock price falling 36% over five years.
JD Sports has felt a ripple effect: its own share price is down 40% in the same period.
Ongoing weak demand for Nike shoes is a risk to revenue and profits for JD Sports, in my view.
But, trading for eight times earnings, JD Sports shares look undervalued to me. Although it is a London-listed firm, it has an extensive business in the US and many other global markets. If sales momentum stays strong, I think the share price could grow.
The business model is proven and highly profitable. It benefits from economies of scale, while its strong brand and exclusive products help set it apart from competitors.
The post The FTSE 100 has outperformed the S&P 500 this year. Can it last? appeared first on The Motley Fool UK.
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C Ruane has positions in JD Sports Fashion. The Motley Fool UK has recommended J Sainsbury Plc, Nike, Nvidia, Tesco Plc, Walmart, and Wise Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
