Just like me, many might wonder about the merits of looking beyond the FTSE 100 to international indexes such as the S&P 500.
Both contain blue-chip companies with attractive growth prospects. But as a cross-border investor, it can be hard to compare apples with apples. So here’s why I prefer the UK index to its larger US counterpart right now.
Concentration
Let’s start with size. The S&P 500 is enormous with a market cap of around $42trn (£32trn) today. In comparison, the Footsie boasts a £2trn market cap. Despite this greater depth and breadth, I like the smaller (but mighty) UK index for its diversification.
The ‘Magnificent 7’ stocks within the S&P 500 — Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla — comprise more than a third of the US index. That means large swings in individual companies can shift the overall market.
By contrast, the four biggest Footsie constituents contribute 26.9% of the index with the largest, AstraZeneca, accounting for 8.5%.
Economic backdrop
The second piece of the puzzle for me is the economy and macroeconomic environment. The UK has a newly elected government with a pathway to make change based on a landslide victory.
Inflation has cooled to 2.2%, almost to the target 2% level, and interest rates have begun to fall.
In the US, it’s a different picture. Geopolitical risks remain heightened, and some have argued the Fed is too late in cutting interest rates.
Combine that with a hotly-contested election with divergent policy views, and I think I’m more confident in the UK.
Valuations
Strong share price growth, fuelled by the likes of Nvidia, has seen the price-to-earnings (P/E) ratio of the S&P 500 skyrocket. In fact, the US index currently has a P/E ratio of around 27.
With the Footsie boasting a P/E ratio of 15.3, I see the case for better value in the next cycle. Of course, no investor would complain about the strong price growth that has pushed US valuations higher.
What about income? The FTSE 100 dividend yield is sitting at 3.5% right now compared to 1.3% for the S&P 500.
Comparing companies across borders is tricky. Tax, capital structure, investor base and overall objectives differ.
That said, Tesco (LSE: TSCO) is one stock that has caught my eye. The UK grocery giant’s shares have gained 21.6% this year to sit at 356.5p as I write.
I like the growth pathway for the company as a consumer staples business, particularly if consumers start to tighten their belts. On the valuation front, the company has a dividend yield of 3.5% and a P/E ratio of 19.
There’s no doubt the supermarket business is a challenging one typified by low margins, fierce competition, and tricky supply chain and cost management.
However, I think I could use potential value stocks like Tesco in my portfolio before looking further abroad to the S&P 500.
Key takeaway
Both the US and UK have great stock indexes with top companies. Given the challenges around cross-border investing, and a wish list of Footsie stocks when I get the cash, I think I’ll be investing in the UK for now.
This post was originally published on Motley Fool
