Is the FTSE a dying market?

Train runs both UK and global equity funds and his company also operates US and Japanese products, so he can hardly be accused of talking his own book. 

He says that in the first half of 2023, the US equity market returned 11 per cent for investors, in sterling, while the domestic market delivered a positive 2.6 per cent. 

Tyndall head of partnerships James Sullivan says the FTSE 100 has become somewhat unloved by many in recent years, and most investors he engages with proclaim to be underweight. Instead, they seek their rewards elsewhere, typically in the US, where “growth” is easier to find.

But the question is at what price does the FTSE 100 become too cheap to ignore?

The FTSE 100 is 35 per cent cheaper today on a price-to-earnings multiple against its own 12-year average, according to proprietary screens.

Some suggest they would rather overpay for growth than underpay for value, but the FTSE 100 is far more than just a set of moribund value companies destined for the scrap heap.

It is a global index that exposes investors to trade and revenues on a meaningful discount to historic averages and other developed markets.

That, it is fair to say, is certainly worthy of consideration, as in total circa 75 per cent of the index’s revenues are sourced globally.

Big tech comes roaring back

Train says there is consensus on why the FTSE has underperformed its rivals for most of the past decade, namely the lack of, or perceived lack of, big technology stocks in the index. 

Conversely, the FTSE 100 was actually the best-performing developed equity market worldwide in 2022, as the relative lack of technology exposure and extensive exposure to energy companies meant the composition of the market was in line with broader investor sentiment. 

But 2022 proved to be an outlier, rather than the start of a new era, since this year the biggest technology companies have come roaring back into favour. 

UK indices have pretty limited exposure to the UK economy, and the UK economy is very much driven by external factors. At the end of the day, the UK is a pretty small market in a global context David Jane, Premier Miton

Many investors take the view that if an asset has been out of favour for a prolonged period of time, it becomes a “buy” as its valuation will revert to the mean over time. This is known as the value style of investing, and it is not an approach that Train pursues.

He says assets can stay cheap “for a long time”, but adds that the investment opportunity comes from the whole market being out of favour, so companies can be acquired at cheap valuations, although some firms within the market are growing.

Premier Miton multi-asset investor David Jane says that while his UK exposure across a range of funds is low at present, “it’s more a function of the sector exposure which really drives UK performance relative to other markets”, than a comment on geographical location. 

Jane says the performance of the FTSE is determined by investor sentiment towards the assets that dominate the index, notably banks, oil and commodity stocks, while he currently prefers other areas. 

In his view, higher global inflation would lead to the FTSE performing well again. “I am not sure the domestic economics and politics really make much difference. There was a period where EU investors divested from the UK post Brexit, but that was short-lived,” he says. 

“The UK indices have pretty limited exposure to the UK economy, and the UK economy is very much driven by external factors. At the end of the day, though, the UK is a pretty small market in a global context. 

“US investors look at everything foreign as a single block often, and in that context there isn’t much in the UK that they can’t access domestically, unlike, for example, India.”

Ian Lance, who runs the Temple Bar Investment Trust and other mandates, is less sanguine than Train.

Lance says he has spent “years” trying to convince investors of the merits of UK equities, without success, as he feels the “evidence” is that valuation is the long-term determinant of returns. 

Train says that while the UK market does contain many stocks that are in high-profile technology areas, he believes some, such as Sage, do qualify. He adds that his UK equity portfolio is comprised of around 40 per cent of what he considers to be technology businesses.

Market movements?

Alongside concerns around the relative performance of the UK market is the lack of new companies choosing to list in London.

Indeed, the direction of travel has been the other way, with FTSE 100 stalwarts such as building materials business CRH switching its listing to the US market.

In contrast, just one new company has listed on the UK market this year — Cab Payments, whose shares have fallen 10 per cent since it came to market.  

Oliver Brown who runs the MFM UK Primary Opportunities fund, which specialises in investing in initial public offerings and new share issuances, acknowledges that few companies are looking to list in London soon, but says: “This isn’t really a UK specific phenomenon. Markets are turbulent right now.

“The US market is up quite a bit this year, but that’s driven by seven stocks. Strip those out and it hasn’t really performed better than the UK market.” 

Brown says that one of the reasons sentiment towards UK equities is so weak — with Morningstar data showing that more than £6bn has been pulled from large-cap UK equity funds since the start of 2023 — is that many investors are sceptical about the political and economic direction of the country.

Additionally, Brown says the majority of the earnings of UK-listed companies originate outside the UK. 

Sullivan says the FTSE will “never be the next Nasdaq, dominated by technology companies, and will never score highly on environmental, social and governance criteria due to the large weighting in mining, oil and gas, but from an investment perspective it is an underpriced selection of heavyweight global companies that should go some way to complementing a broader multi-asset or global portfolio. It should be overlooked, particularly on current valuations, at one’s peril”.

Rarely should every investment investors make be of the same style, and the FTSE 100 certainly permits diversification of style and factor.

The US market is up quite a bit this year, but that’s driven by seven stocks. Strip those out and it hasn’t really performed better than the UK market Oliver Brown, MFM UK Primary Opportunities fund

The FTSE 100 offers investors exposures that are not found elsewhere in such measure, exposures that go some way to complementing the characteristics found within the five or six names that have dominated the returns of the US market in recent times.

These characteristics are rarely recognised until they are desperately needed, as was witnessed in 2022.

A more “short-duration” aspect to investing is at times eminently sensible, and should not be seen as anything other than prudent diversification into a market that offers long-term growth and income attributes.

David Thorpe is investment editor at FTAdviser