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Both the main FTSE index and the S&P 500 have hit fresh record highs within the past few weeks. This presents UK investors with an interesting dilemma. With new cash to put to work, does it make more sense to stick to the UK stock market, or is it worth buying AI high-flyers listed across the pond? Here’s where my head is at right now.
The case for the FTSE 100
The most obvious reason to root for the FTSE 100 is on the basis of the price-to-earnings (P/E) ratio. It’s currently at 17.7, versus 31.3 for the US stock market. Therefore, even though both indexes are near record levels, I’d argue the FTSE 100 could rally further. This is because the ratio is less stretched than in the US. Not only that, but there’s a large difference in the average P/E ratios.
Another factor is the dividend yield. The average yield of the FTSE 100 is over double the S&P 500. So let’s say that we do get a correction in global stocks before the end of the year. If an investor has a good portion of UK holdings, the income payments from dividends can help to cushion any potential unrealised losses from the share price movements. This might not seem like a big deal, but it can certainly be a helpful element when thinking about where the real value is.
Capital growth and dividends
One example of a pick that makes this point well is Games Workshop (LSE:GAW). The stock is up 30% over the past year and has a dividend yield just under 4%.
Even though the company has done well, the P/E ratio is 26.05, below the average for the S&P 500. The dividends have been increasing for the past few years, in line with the rising earnings per share.
I think the business can maintain its momentum, in large part thanks to its deeply loyal fan base and a unique, immersive universe that gives it pricing power. As we’ve seen from recent product drops, consumers are willing to pay premium prices for its miniatures, games, paints, and related IP-based products.
The high profit margins it enjoys (especially in licensing and IP extensions) give it leverage to scale profitably even if costs rise or competition increases somewhat.
The company has warned of possible profit hits due to tariffs (especially in the US) and higher costs. That could be a risk going forward.
Don’t forget the S&P 500
Despite the value appeal of the FTSE 100, there are reasons to like the US. The S&P 500 offers exposure to the global leaders in AI, tech, and healthcare, areas that have generated sustained compounding returns in recent years. Investors simply can’t replicate this in the UK.
The US economy has proven far more resilient than the UK’s, with lower recession risk and higher productivity growth. That’s another appeal to diversify a portfolio away from the UK.
Overall, I think the UK is better value right now, but investors can look to build a portfolio with some exposure to both, getting almost the best of both worlds.
This story originally appeared on Motley Fool
