The FTSE 100 is washed-up rubbish, right? Wrong!

Recently, I have read many articles suggesting that the UK stock market is a dead end, backwater or graveyard for global investors. When in FTSE 100 indeed contains many ‘old economy’ businesses, I generally disagree with this negative view.

Indeed, when I look at the big stocks in the UK today, I see dozens of candidates for the family portfolio. To me, London-listed stocks seem unpopular, undemanding – and very cheap. One day, that might change.

What’s so bad about the FTSE 100?

One of the reasons why the Footsie got such a bad press was their poor long-term performance against the USA S&P 500 index. Here are the results of both indices over five time scales:

Index	FTSE 100	S&P 500
Three months	+0.6%	+4.7%
six months	+12.4%	+14.4%
A year	+1.6%	-7.0%
five years	+5.1%	+53.7%
Since April 13, 1984	+585.6%	+2,509.5%

Over four of those five periods (except for one year), the S&P 500 has outperformed the FTSE 100. Furthermore, in the past 39 years, the American index has actually beaten its British cousin.

Say I invested £1,000 into the Footsie and the S&P 500 almost 40 years ago. Today, my Footsie holdings are worth £6,856. Meanwhile, US shares are worth £26,095.

Clearly, I know which investment I prefer beforehand. But hindsight is very good, when past performance is not a guide for future returns.

Now for two warnings

There are two main problems with the above analysis.

First, this return ignores currency fluctuations between the British pound and the US dollar. For example, in April 1984, the GBP-USD pair was around $1,424. Today, the range is $1,242.

In other words, the Pound Sterling is worth less to the dollar today than it was 39 years ago. That makes a dollar investment in the S&P 500 worth about 14.7% more today in my home currency.

The second problem is that the returns above do not include cash dividends. In the US, most companies consider dividends a poor use of money. Often, US companies prefer to reinvest profits into future growth.

Meanwhile, reinvested dividends are a key component of long-term returns from UK stocks. Today, the Footsie yields a dividend of 3.7% per year, while the S&P 500’s cash yield is just 1.7% per year.

However, after adjusting for currency and dividend fluctuations, it is clear that the S&P 500 has beaten the FTSE 100 for most of its investment life (which began in 1986).

Why not have both?

Currently, US stocks account for more than half (58%) of the global equity market. Also, at almost a quarter of world output, the US economy is by far the largest. So I’d be mad if I didn’t continue to invest in the US, agree?

By comparison, the UK stock market is worth less than £2.5trn, just 4.1% of total global equity today. At the end of 1999, this proportion was 9.4%.

Even so, I will continue to invest in undervalued and overlooked UK stocks, especially the cheap FTSE 100 stocks. Why? Because Footsie trades at a modest price-to-earnings ratio of 12.4 and yields a tasty 8.1%. And as a lifelong bargain hunter, I love buying stocks and socks at discounted prices!