FTSE 100 stocks have been on a great run lately, with the index recently hitting a record 8,000. Does this make them too expensive to buy today?
Some investors apparently think so, given that the index has stalled and dipped since breaking through that barrier. However, I would argue this is due to events elsewhere, rather than any problem with the index itself.
I’m looking for bargain shares
Global investors have been spooked by the thought that the US Federal Reserve will push interest rates higher than expected and hold them there for longer. We may have to be patient for the fabled “pivot”, when the Fed starts cutting instead of hiking. That thought was enough to bring the recent rally to a sudden halt.
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If investors have stopped buying FTSE 100 stocks because they think they are too pricey, I reckon they are making a mistake. By conventional metrics, they are nothing of the sort, according to figures I’ve been given by investment platform Bestinvest.
Its managing director Jason Hollands says the FTSE 100 may be at an all-time high but this doesn’t tell us anything about valuations. A better measure is the relationship between share prices and expected profits, and by this metric the index remains “compellingly cheap”.
The FTSE 100 is currently trading at just 10.7 times forecast earnings. This is well below its long-term average price-to-earnings (P/E), which is closer to 16 times.
It is even cheaper when measured against the rest of the world, which trades at 15.7 times earnings, Hollands says. That’s a discount of 32%, which is “the widest in decades”.
Many investors underestimate the FTSE 100 because they assume it’s facing the same problems as the UK economy. Yet this is not a domestic index, but an international one, with listed firms generating almost 80% of their revenues from beyond the UK. It has more exposure to the US and Asia than our own troubled isle.
It’s a Chinese market, too
The FTSE 100 is due a boost from China’s post-Covid reopening, as UK large-cap stocks generate a staggering 13% of their combined revenues in China.
The FTSE 100’s big attraction is the generous dividend income it offers investors. Its forward dividend yield is currently 4.0% a year, which is at the top end among the major markets and compares to 2.3% on global equities. It is also at a handy premium to the current 3.4% yield on 10-year gilts.
Hollands shares my view the sector composition of the UK market is attractive in today’s uncertain world, given its high weightings to commodities and energy, as well as defensive sectors like consumer staples and healthcare.
When the economy is struggling, consumers are unlikely to stop taking their tablets or buying bleach, toothpaste, soap, beer, and cigarettes.
I’m on the hunt for FTSE 100 stocks, while avoiding any that climbed too rapidly in the recent rally, just to be safe. A good number of top stocks still trade on single digit P/Es, including Barclays, BT Group, Glencore, Mondi, and Rio Tinto, and that’s where I’m beginning my search. I’ll buy more of them in March.
