The FTSE 100 has handily outperformed the S&P 500 this yr. The US index has declined by 22%, whereas the UK index has solely misplaced 4.23%.
I feel that it’s because the composition of the FTSE 100 permits it to deal with inflation and rising rates of interest significantly better than its US counterpart. Furthermore, I count on this latest development to proceed for a while.
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Inflation has been one of many main macroeconomic themes of 2022. One of the obvious examples of that is oil, which has elevated in value from round $76/barrel to round $120/barrel.
High oil costs have been constructive for power shares. Shares in BP are up round 25% and shares in Chevron have gained 47%.
Since power shares make up round 9.5% of the UK index, in comparison with 2.67% of the S&P 500, this has had a disproportionate impact on the FTSE 100.
Inflation has additionally been constructive for mining shares. In the UK, Rio Tinto inventory is up 16% because the begin of January and Vale within the S&P 500 has seen its inventory rise by 22%.
Commodities shares are additionally an even bigger a part of the FTSE 100 (13.39%) than the S&P 500 (2.56%). So inflationary results on mining shares have additionally helped the UK index greater than the US one.
Rising rates of interest
On the opposite facet of the coin, the US index has been disproportionately affected by forces driving inventory costs down. Rising rates of interest have been exerting strain on inventory costs, particularly these buying and selling at excessive price-to-earnings (P/E) multiples.
At the beginning of the yr, the S&P 500 was buying and selling at a P/E ratio of round 23. The FTSE 100, in contrast was buying and selling at a P/E ratio just under 15.
This is partly as a result of US index having a a lot greater focus of know-how shares (29%) in comparison with the UK index (1.41%). These are likely to commerce at greater P/E ratios, making them extra weak to rising rates of interest.
Rising rates of interest have due to this fact hit the US index tougher. The UK index, in contrast, has been considerably shielded from the consequences of rising rates of interest.
It’s value noting that the outperformance of the FTSE 100 is a comparatively latest phenomenon. Over the previous 5 years, the S&P 500 has superior 60%, in comparison with a 2% decline for the FTSE 100.
Nonetheless, I don’t see the present macroeconomic state of affairs altering any time quickly. I feel that the consequences of inflation will persist for a while and rates of interest will proceed rising.
On prime of that, I feel that the makes an attempt of central banks to regulate inflation will doubtless carry on a recession within the subsequent couple of years. That implies that I’m anticipating the FTSE 100 to proceed to outperform the S&P 500.
As a end result, I feel that now may be a good time to purchase shares in UK companies. I’m trying to consider corporations individually, reasonably than shopping for into an index, however I feel that there may be some good alternatives for me within the FTSE 100.
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