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The FTSE 100 index has attracted its fair share of criticism in recent years. Arguably, much of the flak has been warranted.
Recent research from Goldman Sachs has revealed that the Footsie delivered a 6% total annual return over the past decade. Compared to 8% for Europe’s Stoxx 50 and 13% for America’s S&P 500, Britain’s largest shares have been international laggards.
However, there are indications the tide could be turning for FTSE 100 stocks. Consequently, UK investors might consider looking closer to home for strong future returns. Here’s why.
A rare bargain opportunity
Using the 12-month forward price-to-earnings (P/E) ratio as a gauge, FTSE 100 shares look remarkably cheap relative to pricier stocks stateside.
UK shares trade at a 55% discount to their US counterparts. This gap is the widest it’s been since 1988 by a considerable margin. Value investors have good reasons to view today as a potential buying opportunity we haven’t seen for many, many years.
However, as a note of caution, this gulf has widened substantially since the 2016 Brexit vote and shows little sign of narrowing. At least for now.
Worryingly, UK-focused equity funds have suffered retail investor outflows for three years on the trot. There’s a risk Britain’s stock market malaise could continue for a while yet. Restoring investor confidence is far from guaranteed.
The stagnation of Japanese stocks for 30 years, starting in the early 1990s, is evidence of how long the suffering can persist in developed equity markets.
Where next for UK shares?
That said, the comparison with Japan only goes so far. Its ‘Lost Decades’ followed the bursting of a huge asset price bubble amid periods of monetary tightening.
By contrast, the UK seems to be heading in the other direction today. Despite holding interest rates at 5% in the last Monetary Policy Committee meeting, the Bank of England indicated it’s on a trajectory towards further easing over the coming months.
Governor Andrew Bailey said interest rates are “now gradually on the path down“. Additional rate cuts could spark some much-needed growth for FTSE 100 share prices.
In this context, I can see the logic behind the latest Goldman Sachs FTSE 100 forecast. The bank predicts the index will surge to 8,800 points within 12 months. As I write, the Footsie’s hovering around the 8,233 level.
A FTSE 100 stock to consider
Identifying which shares in the index appear deeply undervalued can be very lucrative over the long run. One candidate to consider buying is pharma giant GSK (LSE:GSK).
The stock’s forward P/E of 8.64 is well below the average for other companies in the industry and the index as a whole.
GSK also stacks up well on other valuation metrics. A price-to-book (P/B) ratio of 4.4 and price-to-sales (P/S) ratio of 1.8 both indicate a potential bargain.
Granted, long-running litigation concerning the firm’s Zantac heartburn medication continues to cloud the growth outlook. Disappointing sales for the company’s shingles and respiratory syncytial virus (RSV) vaccines are also a cause for concern.
But, I’m pleased to see other areas of the business, including cancer, HIV, and other speciality medicines, are growing fast. The group’s overall revenue performance exceeded expectations in Q2 and FY24 guidance has been upgraded.
