By Clem Chambers Senior Contributor
Elevated view of the City of London’s financial district skyline.
While the US markets are nose-bleedingly high, the U.K. stock market is teeth-achingly low.
Even the biggest chart sceptic can’t say this chart of the SP500 versus the FTSE 100 doesn’t reveal plenty:
The U.K. FTSE chart compared to the U.S. SP500
Credit: ADVFN
You might put that down to the mighty U.S. economy, but that would be wrong, because the apparently woe-begotten German economy has a market performance like this:
The FTSE, SP500 and Germany’s DAX compared
Credit: ADVFN
You will also note that Germany has no FANGS or MAG7s to juice its indices. The underperformance is systemic.
So, there is only one call to make about the U.K. stock market: it’s a dead duck or a slumbering giant. Well, probably not a sleeping giant, but you get the idea. Whatever it is, something around 2012 broke whatever magic was keeping it in line with the U.S. and Germany. Well, it wasn’t Brexit – that was 2016-2020.
Now, I could theorise why the FTSE 100 stagnated, and there are plenty of ‘blah, blah, blah,’ retro-narratives, but to me the key question: is what next?
Let’s look closer:
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The FTSE chart: a closer look
Credit: ADVFN
We see a series of repricings, but the gentlest of appreciation. Bear in mind, the index is throwing off yield at twice the rate of the Dow. These repricings are accelerating, but even a 50% jump would still have the market in the doghouse.
Now, you might imagine that the market is full of U.K. local companies with no international value, but the opposite is true. Most companies in the U.K. index are global companies, and they are, in effect, selling at half price.
A takeover rush has now begun, and it will turn into a torrent. This will drive the market up for sure. Also, the dollar appears to be in for a tumble as Trump goes for a malleable, low-interest-rate Federal Reserve. If he succeeds in getting this, it will create a South American vibe which will certainly make all other major currencies look good. Therefore, companies not denominated in dollars will look like fine places to hide in.
Make no mistake, the U.K. market is a contrarian play, but in an environment where no one knows what the new normal might be, cheap, dividend-paying, low P/E stocks – which are not denominated in a falling dollar – might suddenly look like the place to be.
A sudden break by the FTSE over 9,000 should be the cue to take a good look at what’s on offer, and much of it has ADRs to bail into.
The dollar is in for a fall, perhaps not a terribly heavy one, but most likely enough to have an ocean of liquidity hunting for relief. That liquidity will spike non-dollar assets, so now is the time to get your watch list in order to see the action develop. The good old U.K. is about as cheap an option as you’ll find.
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