Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
The attitude of international investors towards shares in British companies is clear: they want out.
Global fund managers surveyed by Bank of America said this week that, of all asset categories, the one they had turned their backs on most decisively this month was UK stocks.
‘Contrarian’ investors may feel their ears pricking up. Such investors are attracted by the assets everyone else avoids, in the belief that this is where bargains are to be found and that stock market fashions come and go – what is shunned today may be feted tomorrow, and vice versa.
But how cheap are London-listed stocks relative to their international rivals? We’ve run some simple valuation screens, presented in the graphs below, to find out.
Screen 1: price-to-earnings ratio
As you can see, the London market (as represented by the FTSE 100 index) is not the cheapest – that crown is worn by Hong Kong’s Hang Seng index – but it is towards the cheaper end of the scale with a p/e of 17.8. Hong Kong’s is 12.3.
This means that, on average, Hong Kong’s stocks have a share price that’s 12.3 times their annual earnings per share. Or in other words, for the average company to make profits equal to the amount you invested would take 12.3 years, assuming that profits didn’t change from year to year. A low p/e ratio suggests, therefore, a cheaper stock.
While a p/e ratio of 17.8 for the UK may not strike you as especially cheap, we should point out that there are different ways to calculate the ratio (it can be based on adjusted or unadjusted earnings, or last year’s actual earnings or the current year’s forecast earnings), so of more interest here are the relative positions of the various markets in the chart.
Screen 2: dividend yield
A high dividend yield can also suggest that a share or a market is cheap, although other factors are at play here, such as the strength of the dividend-paying culture in the country concerned and the extent to which companies need or prefer to reinvest profits in pursuit of growth. British firms have always been known for generous dividends and the London market’s current yield of 3.3% is the fourth highest among the countries studied.
Screen 3: price-to-book ratio
This measure is less familiar than the p/e ratio and yield. It compares a stock’s market value with the value of its assets (on a net basis – that is, the value of its assets minus the value of its liabilities). A ratio below 1 suggests that a company would be worth more than the current market valuation if it were wound up and its assets sold, although we could never be sure that the assets would actually fetch the value given to them in the company’s accounts.
As the p/b ratio rises above 1, the market value has less and less ‘backing’ from the firm’s assets. This is not automatically a bad thing; many highly profitable tech companies, for example, are ‘asset-light’ because they have little need for physical assets.
On this measure too, the UK is one of the cheaper markets.
The names of the stock market indices used for our comparison have been omitted from the charts for reasons of space. Here is the list:
- Australia: S&P/ASX 200
- Canada: S&P/TSX Composite
- China: CSI 300
- Europe: FTSE Eurotop 100
- France : CAC 40
- Germany: Xetra DAX
- Hong Kong: Hang Seng
- India: Nifty 50
- Italy: FTSE MIB
- Japan: Nikkei 225
- South Africa: JSE FTSE Top 40
- Taiwan : FTSE TWSE Taiwan 50 Index
- UK: FTSE 100
- US: S&P 500
- US tech: Nasdaq Composite
If you’ve got a burning question you want to ask, why not drop us a line? Ask us your question.
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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