The UK stock market is cheap but will it ever get luck on its side?

If I had a pound for every time I’ve read that the UK stock market is cheap, I’d probably have made considerably more money than I’ve made over the last decade backing those ‘bargain’ UK stocks.

A look at the long-term chart of the UK’s leading index, the FTSE 100, tells you everything you need to know about why the UK stock market is considered by some to be eternally unlucky.

Every time he’s run properly since the turn of the millennium, something has arrived to knock him off his perch.

The FTSE 100 chart over the past two decades is a picture of slow rises, followed by sudden falls, then a slow rise back to roughly comparable levels.

In contrast, the US stock market, as measured by the S&P 500, looks more like the steady upward growth path investors usually get, as they are urged to think long term.

If you look back to the peak of the dotcom boom in late 1999, you’ll see that the FTSE 100 chart is much more like that kind of long-term growth picture. Hence investors’ grumbling about the lackluster performance of the UK stock market since the bell rang in the early 2000s.

The chart of the US S&P 500 over the same period looks much more like a picture of long-term growth, thanks in large part to the post-financial crisis boom

At 7,818 on April 12, 2023, the FTSE 100 was only 13 percent higher than the peak of the December 31, 1999 dotcom bubble.

To be fair to the FTSE 100, plenty of dividend income has been paid out along the way, making the overall return on investing much better.

It should also be noted that the broader FTSE All Share, which encompasses almost all of the UK stock market, has outperformed – up 31 per cent since the end of 1999.

Nevertheless, the FTSE 100’s 13 percent rise in 23 years does not bode well for a major global stock market index.

Especially when that irritating, high-performing big brother on the other side of the Atlantic, the S&P 500, is up 180 percent.

The good news is that the UK stock market is still cheap.

The Schroders Equity Lens report looked at stock valuations based on a variety of metrics

In his latest Equity Lens Report, Fund Manager Schroderscompared stock market valuations for the US, UK, Europe, Japan and emerging markets.

It did this using several metrics, CAPE (Cyclically Adjusted Price to Earnings), Forward Price to Earnings (P/E), Trailing P/E, Price to Book and Dividend Yield, and then compared these ratios to their 15- year median .

In their traffic light system, the US scored a sea of ​​expensive red.

The UK, on ​​the other hand, was largely cheap green, with an expected P/E of 17% below the 15-year median, a backlog of 15% below P/E and a bookable price of 7% below.

The CAPE ratio for the UK of 14 is 9% above the 15-year median, while the dividend yield is 2% below the medium-term average, but at 3.8%, you’ll generate more income at home than in any of those other markets.

Investors are often warned not to use any of these valuation metrics in isolation, but when the dashboard lights up like this, it’s fair to say the UK is looking pretty cheap.

This confirms what a number of investment professionals and fund managers have been saying for some time – with most claiming that despite the rise in UK equities since the post-mini-Budget gloom in the autumn, they are still value for money.

Mark Slater, a 30-year fund manager responsible for the Slater Growth, Income and Recovery Funds, wrote in a recent message to investors: “Since 2008, we haven’t seen as many of the companies we own trade at single-digit P/E multiples. 9.

“Now, as then, as companies grow their revenues while their multiples fall, they are getting cheaper and cheaper.

“It’s like holding a beach ball underwater. Sooner or later you can’t hold him anymore and he jumps out of the water.

“For a more accurate analogy, someone would also be pumping air into the beach ball as you try to keep it down.”

This echoes the view of Temple Bar manager Ian Lance in our recent Investing Show interview, who said late last year that 2000 and 2008 were the last times he had seen UK stocks at such bargains. His investment trust owns 81 percent of its assets in UK equities, with top ten positions including BP, Shell, Standard Chartered and M&S.

You’ll find that these names are far from what’s generally considered the most progressive in the investment world: that’s not quite the list of Apple, Amazon, Alphabet, and Moderna you’ll find in many a US or global fund.

Their cheap share prices reflect that UK stocks are very much out of fashion and our investment reporter Angharad Carrick takes a closer look at whether the UK stock market is a contrarian opportunity here.

Before diving into investing, however, it’s important to note a few things.

Firstly, recent history shows that you may need a lot of patience and you may eventually end up in ‘bargains’ UK stocks, while other markets are doing better.

My own portfolio confirms this, I would have been much more supportive of the supposedly expensive US over the past decade than the cheap UK.

Second, diversification matters and you need to be careful how much of a portfolio you allocate to a market like the UK, which now makes up just 5.7 percent of the global MSCI ACWI index compared to the US’s 54 percent.

It’s very easy to get much more heavily invested in the UK than you think, which is great when things are going well, but not so good when things are going badly.

And finally, choose your investments carefully.

Supporting individual stocks requires more work than most are willing to put in and the commitment to building a diversified stock portfolio of at least 15 to 20 companies that do different things.

A much safer bet is a fund or mutual fund that does the work of diversification for you, but even then you run the risk of choosing an active manager who you think will outperform the market, of choosing someone who will ultimately falls behind.

Before diving into an active mutual fund or trust, do your due diligence on your track record and determine whether the manager’s outlook and fund’s risk profile are right for you. You can get some expert ideas from our list of the 50 Best Funds and Mutual Funds, but always do your own research.

And remember, you might be better off opting for a cheap tracker instead.

Before buying an investment or targeting a particular country or sector, it is always wise to ask yourself if your money could be put in a cheap global tracker fund instead.

> The best (and cheapest) investment accounts and Isas shares