Forget the S&P, UK stocks never looked so good!

UK stocks are cheaper than their US counterparts. So, as a British investor, I look more at it FTSE 350 and only look at US-listed stocks in exceptional circumstances.

Let’s take a closer look at why I think this.

Mighty Greenback

Let’s start with something very simple. The dollar is very strong right now. Make no mistake, it was strong against the pound when Liz Truss’ budget disaster sent sterling tumbling. But in a broader context, the dollar is currently strong against sterling.

So, what does this mean? Well, if investors have dollars, they can buy more UK-listed stocks for their money today than they could a year or two ago, just because of currency fluctuations. The US dollar is about 10% stronger against the pound today than it was a year ago.

For example, Lloyds – one of my favorite stock pick – it is flat over 12 months. A year ago, shares in the bank would have cost American investors 67c, today they are worth just 60c. That is without movement in the stock price.

The final point is that, in the long term, I see the pound appreciating the dollar and moving in line with its long-term average. So, even if the stock price remains flat, the dollar value of the investment will increase.

Evaluation

The average price-to-earnings ratio (P/E) at FTSE 100 is 14.2, while the average P/E is S&P 500 around 21. Usually, a higher P/E ratio indicates that the company has greater growth prospects or is simply overvalued compared to its peers.

However, it is difficult to make direct comparisons this way. After all, the US index does better with stocks that provide higher growth. Meanwhile, the FTSE 100 is more populated with resource stocks – which typically trade at lower P/Es – than technology, the typical growth stock.

But overall, the US index looks a bit expensive. And some forecasts suggest the S&P could fall sharply this year.

One of the predictions came from the legendary British investor Jeremy Grantham. The co-founder of GMO – an investment management company founded in 1977 – believes that the S&P 500 will fall 16.7% by the end of the year. This represents a real decline of 20% for 2023.

By contrast, the The FTSE 100 could push up to 9,275 in July, according to the Economic Forecast Agency. This is the highest peak of the forecast, but the average forecast for July is 8,750 – which is 12.5% ​​of the current position.

Improving the UK outlook

Finally, we know stock prices are depressed when economic forecasts are weak. And it is certainly the case that the UK 2023 forecast has not been good, especially compared to the US.

However, things are changing. It is still not particularly rosy, and there will be continued pressure on sectors such as housebuilding. But some analysts are now suggesting that the UK will avoid recession this year. That’s a huge turnaround. And, in my opinion, it could be better. I hope the new Brexit agreement in Northern Ireland will unlock billions in investment as well.