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What a tumultuous year 2022 has been for global investors. In the second half of 2021, I repeatedly warned that 2022 could be a difficult year. I feared that higher volatility, lower liquidity and wider spreads could send share prices tumbling. And that’s exactly what’s happened around the globe — apart from the FTSE 100 index, that is.
Here’s how the FTSE 100 and four other major market indices have performed since 31 December 2021, excluding dividends (sorted from highest to lowest loss):
|Index||2022 YTD return||12-month return|
|STOXX Europe 600||-12.8%||-3.8%|
As you can see, the tech-heavy US Nasdaq Composite index has had a brutal 2022. Having fallen by more than 20%, this index is now in a bear market. Close behind it lies the massive S&P 500 index, which has lost almost a sixth (-16.1%) of its value since 2021. European (-12.8%) and Japanese (-9%) indices have fared much better than US markets. However, the standout star — and perhaps the only safe haven for investors this year — has been the FTSE 100, down a mere 1.5%.
Why I like the FTSE 100 today
Since mid-2021, I’ve argued that US growth stocks — and tech shares in particular — were widely overvalued. Hence, I stopped pumping money into expensive US equities and started building up cash and buying cheap UK shares. So far this year, this strategy has been almost flawless. Yet I’m still a big fan of the FTSE 100 today.
What do I like about the Footsie and its constituents right now? First, as an old-school value investor, I prefer the FTSE 100’s bias towards value over growth. Second, the index is more global than British, with about three-quarters of Footsie earnings being international. Third, with the weakening pound at its lowest level against the US dollar since June 2020, these overseas earnings are worth more in sterling terms.
Fourth, the FTSE 100 has historically been less volatile than other high-valuation stock indices during market crises (as we’ve seen in 2022). Fifth, the Footsie’s concentration of lowly rated commodity, utility and energy stocks has been a positive boon in this troubled year.
And sixth, in historical and geographical terms, the FTSE 100 is still cheap today. The index trades on a forward price-to-earnings ratio of 11 and an earnings yield of 9.1%. Also the dividend yield approaching 4% a year is one of the highest cash yields in world stock markets.
I’ll keep buying
To sum up, I think the FTSE 100 has held up in 2022 because it is still too cheap, even today. Here’s how the index has performed over six timescales:
|Year to date||-1.5%|
Though the FTSE 100 has eked out a small positive return over one year, it’s marginally down over five years. But adding in dividends would boost returns from six months through to five years into positive territory.
To sum up, I like the UK index today because it’s a bargain. And though I worry about Covid-19, the Ukraine war, recession risk, inflation and interest rates, and slowing Chinese growth, I’d still happily buy the FTSE 100 today!