Your Stock Market Needs You: With US stocks hitting record highs, should you buy these British bargains instead?

These are good times for stock markets on both sides of the Atlantic, but the US is way ahead.

In Britain, the FTSE 100 index of leading shares was trading close to its record high and is up almost 8 percent so far this year. Across the pond, the gains are even more dramatic.

The S&P 500 is up 23 percent and has already reached new highs in 44 trading days in 2024 – one of the highest numbers ever. And the gap between the returns of the UK and US markets is widening.

The FTSE 100 has gained 17 percent in five years, but the S&P has done much better, almost doubling in value in that time.

If dividends paid by companies were reinvested, the FTSE 100 delivered a total annual return of 6 percent over the past decade, according to a recent report from investment bank Goldman Sachs. That compares with 13 percent for the S&P 500.

Some of the difference can be explained by weak corporate profits in Britain, along with domestic political upheavals in the wake of the Brexit referendum, Goldman said.

The Wall Street giant’s analysts also mentioned that unlike the US, London’s stock markets do not have a large technology sector.

Technology stocks were behind much of the US performance. However, much of this is due to the fact that UK investors, including pension funds, have simply avoided London-listed shares, which has driven down their market valuations.

Foreign investors own around two-thirds of the UK stock market.

Goldman notes that the only net buyers of UK shares in recent years have been companies buying back their own shares.

Traditionally, private investors in Britain have tended to invest the majority of their savings in companies listed on the London Stock Exchange, not least because this is simpler and there is no risk of the currency turning against them .

Many also want to support British businesses that are creating jobs and prosperity here.

But given the growing appreciation gap between the US and Britain, it wouldn’t be a surprise if even the most patriotic British savers looked enviously at their American cousins ​​– and started looking for a piece of the action themselves.

“Returns can be significant for investors who can see past their house bias,” said Richard Flynn, British director of Charles Schwab, the largest broker in the US.

Critics of the US stock market boom say it is heavily concentrated in a few technology stocks.

That makes returns more volatile and increases the chance of a broader crash if investor sentiment turns against Silicon Valley companies such as chip giant Nvidia or sectors such as artificial intelligence (AI).

The frenzy over technology in general – and Nvidia in particular – has inflated what some see as the biggest bubble in stock market history.

“More than $10 trillion in stock market value has been created since the AI ​​hype began,” according to The Kobeissi Letter, an investment guide.

To put that into context, Nvidia is worth $3.4 trillion (£2.6 trillion) – almost 12 percent of the annual output of the entire US economy – and is about to overtake iPhone maker Apple as the company’s the world’s largest listed company.

However, reports that the US government may limit the number of chips that can be shipped to certain countries temporarily halted Nvidia’s advance last week – a reminder that tech stocks are not for the faint of heart. But US stocks have much more to offer than technology stocks.

Russ Mould, investment director at broker AJ Bell said: ‘America is the largest economy in the world’, adding that ‘wealth and success are celebrated, not vilified’ and that ‘companies are run very much with the bottom line and the shareholder in mind’. .

Americans are also very interested in managing their own investments and there is a much stronger culture of individual share ownership than in Britain.

A similar process is underway here. But experts warn that increasing capital gains tax on share sales in next week’s Budget – or scrapping inheritance tax for shares in the junior AIM market – will do little to revive the London market.

Think tank New Financial discovered that more than six hundred British companies have disappeared from the British stock market over the past twenty years, for various reasons.

But the US has other important advantages that rivals cannot match. And in addition to having the largest stock market in the world, the US is also home to the largest bond market.

The dollar is still the world’s reserve currency. Then there is the economy. Despite talk of a recession in the summer, the economy is still growing by more than 3 percent.

“What’s not to like?” asks AJ Bell’s Mould. Perhaps the biggest risk is that the undoubted advantages of the US markets are already known and ‘priced in’ to robust valuations. Simply put, the problem is that US stock prices are high relative to expected future earnings streams, which means there is less chance that they will continue to rise and more chance that they will fall.

“The last time the U.S. stock market was so dominant among global markets was in 2000, just before the technology, media and telecom bubble burst and the tech-rich Nasdaq index plunged by almost 80 percent,” says Mold.

He recommends that you not succumb to FOMO – “fear of missing out” – and instead stick to an investment strategy that fits your overall goals. Does this mean a bet on Britain will pay off? Maybe.

Mold counts Britain among unloved markets that may be undervalued.

Goldman Sachs agrees. The bank believes the FTSE 100 will reach 8,800 within a year, 5 percent higher than current levels.

Another sign of hope is that inflation is moderating. This gives the Bank of England room to cut rates twice before Christmas, Goldman says.

Low interest rates tend to be good for stock markets because they reduce the returns available on risk-free savings accounts.

So there are reasons to be hopeful about Britain. But in the long run, investors who invest part of their portfolio in the US have the opportunity to share some of the prosperity of the world’s largest economy.