The UK has become home to some of the cheapest companies in the developed world. It has also continually lagged its global peers in the past few years. The blue-chip FTSE 100 index barely rose in 2023 as the German DAX and French CAC 40 hit their all-time high.
UK continues to underperform
Similarly, the FTSE 250 index, which tracks the country’s mid-cap companies, also trailed its global peers. While the iShares MSCI UK ETF (EWU) is nearing its all-time high, its overall performance has trailed that of other popular benchmarks like SPY (NYSE:SPY) and QQQ.
FTSE 100 vs EWU ETF vs S&P 500
This trend has made the UK market a bargain in the stock market. Data by FactSet shows that the FTSE 100 index has a PE multiple of 10 while the S&P 500 index stands at 21. The Dow Jones has a PE ratio of almost 30.
This discrepancy implies that investors don’t expect any meaningful earnings growth from the UK. In the US, however, the market expects the recent earnings growth trend to continue in 2024. In a recent note, Factset noted that the full-year earnings growth will be about 11.7%, higher than the trailing ten-year average of 8.4%.
The cheaper valuation can be seen well when looking at how individual UK companies trade vs their American peers. Shell (LON:RDSa), the biggest company in the FTSE 100 index, trades at a a forward PE ratio of 8.81 compared to Exxon’s 10.8. BP (LON:BP) has a forward PE of 5.78. The same is true when looking at other multiples like EV to EBITDA and price-to-book.
UK energy stocks are not the only ones much cheaper than their American peers. British banks like Lloyds (LON:LLOY), NatWest (LON:NWG), and Barclays (LON:BARC) also trade at a much lower valuation compared to companies like JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC). Barclays has a forward PE multiple of 6.97 compared to JPM’s 10.2.
FTSE 100 and FTSE 250 Composition challenge
The other reason why the FTSE 100, FTSE 250, and EWU ETFs have constantly lagged their peers is their composition. To a large extent, US indices like the S&P 500 and Nasdaq 100 are forward-looking while British indices are backward-looking.
For example, technology is the future of most sectors, including automobile, banking, and manufacturing. Some of the top technologies of the future are quantum computing, artificial intelligence, and machine learning.
A closer look at UK and US indices shows a clear divergence. In the US, the biggest companies are in the tech industry. They include companies like Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN), which have invested heavily in technology.
In the UK, the FTSE 100 index is mostly dominated by companies in the financial services, mining, and industrial sectors. Only a handful of companies in the FTSE 100 index like Sage and Ocado (LON:OCDO) can be categorized into the tech industry.
In addition, the UK and US investors are quite different. In the US, big investment companies like Blackrock (NYSE:BLK) and Fidelity own most companies. And beneath them, retail traders are actively involved in the market.
In the UK, the situation is different as most institutional investors are more risk-averse. Most of them have moved to bonds and American equities. Retail traders in the UK equity market are almost inexistence.
Therefore, it is hard for the FTSE 100 and FTSE 250 indices to compete with their global peers. Besides, several companies have already decamped from the LSE to New York. Other companies like Tui Group and Shell have thought about decamping. The future of London markets is quite uncertain as the IPO market dries up. And the recent efforts by the government to prop the tech industry have failed.