Firstly I need to tell US investors, ‘this might be about the UK but pay attention this applies to you.’ Its dull of me to keep harping on about the difference between the relative valuations of the US and UK markets and you can explain it in many narrative ways or you can simply be Millennial about it and say ‘it is what it is’ but as an investor we should instead say ‘I smell money!’
So lets look at a chart.
So in the last 10 years the Dow has out performed the UK index by 100%. In a nutshell the dow has compounded by roughly 7% while the FTSE hasn’t compounded by much at all.
Should that be the case?
No. Not if the dividend yield is a guide because the dividend yield of the Dow is roughly half that of the FTSE 100. This suggests, in old school thinking that the FTSE long term pricing values its dividends at half the price of the DOW’s. If you think of the FTSE in terms of income alone, the dividend yield should be half what it is and the price should be double to match the level of the venerable Dow Jones.
Dividends have long since lost their position of investment primacy but the logic of valuing a stock by its dividends still has currency and such a divergence is suggestive of either the price of the high priced one should fall or or the priced of the one with cheap dividends should rise, or both. However before we muse on what to do take a look at this.
I’m a fan of accelerating charts. Information flows like honey, so when a long term trend kick off it takes time for them to get on a stable course. The ‘penny dropping’ produces an acceleration and then you see a rocket or a nose dive, with an acceleration towards the repricing momentum. I’m tempted to see such an acceleration in the FTSE 100.
So for the US income investor looking for a crack at the FTSE uplift there is the iShare MSCI UK ETF (NYSE:EWU) which throws off a 3.8% dividend and you the Brit there is the Core FTSE 100 Tracker, LSE:ISF.
The FTSE is a dollar hedge, which is likely why it is rallying. Interest rates down, Dollar down. Its that simple.
Of course its no fun to invest in stodgy stocks when the bright lights of the MAG7 beckon. Look at that cheese on the wooden stage. That metal sculpture is pretty too and oh that cheese is tempting, lets go…..