Why is the UK FTSE so low?

tebbins

Firstly that is a small timeframe over which to make that comparison, UK large cap has been lagging the global market since the mid 2010s, driven mostly by speculation as measured by change in the price earnings ratio.

Secondly - dividends. Whereas the FTSE 100 historically pays out around 2/3 of profits as dividends, this is higher by global standards as the global market is dominated by the US market where buybacks are king. On a total return basis including dividends that "gap" narrows.

Thirdly, it's not so much a tale of UK underperformance as it is of US outperformance - albeit over a small period, due to returns that have come from a concentrated few "growth" companies.

Fourthly and to provide some further context to point 2, to characterise the S&P 500 as "low dividend high growth higher returns" due to a lower (30-50% over recent decades) dividend payout ratio, is simply not borne out in the data. Since the SEC introduced rule 10b-18 in 1982, buybacks have overtaken dividends in the US, and total payouts (dividends + buybacks) are often close to or exceed profits. So really, the FTSE 100 is not only more diverse than the ~50% "tech"-dominated S&P500, but it retains and reinvests more of its earnings, more sustainably with less debt, and has seen higher earnings growth over recent decades.

 

As usual there are some decent and factual comments in here, mixed in with the usual baseless unsubstantiated mantra about how the UK is an old, dinosaur, dire, post-growth economy made up of dying dividend-paying dinosaurs...

This comes up so often I probably should create a thread just to dump all of the research and sources I have used for this, this thread includes some of them: https://forums.moneysavingexpert.com/discussion/6303718/best-vanguard-long-term-holding-fund-please/p1

sevenhills

Deleted_User said:

World produced 720 TWh of solar (estimated by IEA) in 2019, 260GW added capacity in 2020 alone and new renewable sources made up 80% of added capacity in 2020 with the amount of fossil fuel capacity added falling annually.

It's great that we have now got solar and wind, but the point of that "80% of added capacity", is that we are using more energy.

In 2000 we used  117,687(TES, Total energy supply), 2013 157,482(TES) and in 2017 162,494(TES). So energy consumption is rising. Oil shares may be out of favour, but we will be using oil for decades to come.

2010

The Ftse 100 is only 200 odd points higher than it was in 1999.

Prism

2010 said:

The Ftse 100 is only 200 odd points higher than it was in 1999.

The total return has been over 150% over that time so its not all bad. In fact for the first 16 years of that time period the FTSE 100 outperformed most other world markets, but the last 6 years have looked especially bad. One thing to consider is have our FTSE listed companies over that time become comparatively poorer companies or is it simply down to lower valuations. Probably a bit of both.

tebbins

To use 1999 as an example - and specifically the 31st December for convenience, as @prism has rightly pointed out it's easy to see that the underperformance people talk about has only really emerged since the mid 2010s. How much of this is attributable to Brexit no one can say for sure.
The FTSE 100s current PE is 14.9, half the level it was at the turn of the millennium, 30.45. Annualised that knocks -3.2% a year of the return, and the FTSE 100s total return (I'm eyeballing the trustnet chart here) of ~2.2x ^ (1/21.8 years) is ~3.7%. This makes the FTSE 100s "actual" return, with rerating removed, 7.1%.
Global data is not as available, however for the S&P 500, over the same timeframe, the total return was 7.3%, the PE barely moved from 29.04 to 28.16 now (estimate from multpl.com).
Further, likely at least 2%, a whole other dividend yield of the S&P500s return was made up of buybacks instead of earnings growth, whereas the FTSE 100's growth has to overcome an average ~2% a year dilution.

Also bear in mind that most of that apparent earnings difference likely arose very recently due to Brexit, Covid and Trump's corporate tax cuts.

As to suggestions about a difference in quality, according to Vanguard's portfolio data the FTSE 100 and FTSE All World currently share the same Return on Equity. I also think there's a lot more to a business than whether it's tech or not - the UK has a reputation for quality of management and governance, longevity, geographic diversity with ample exposure to the Americas, Asia and Europe, and a robust and disciplined focus on dividends over buybacks. Dividends cannot be "undone" by selling treasury shares or dilution and I would submit this forces management to focus on the business, whereas buybacks encourage management to focus on the share price.

Previous threads: https://forums.moneysavingexpert.com/discussion/comment/78567735/#Comment_78567735

MK62

UK equities have performed well recently though........over the last year in the top 5 fund sectors, the UK occupies 3 of those places...better than the US, better than Europe.......it's not just about the headline indices (unless you are an exclusively passive index investor of course... )

In Life funds....the UK is 1st 2nd and 3rd....same in pension funds....

Fair enough, you could argue it was starting from a relative low.......but the point is that you need to consider all periods rather than just concentrating on one. It's true to say that timing is key in investing, even if it's mostly accidental........an investor who invested £100k into UK equities 5 years ago might be a little peeved, whereas one who invested a year ago will likely be quite happy.......

Thrugelmir

Only two world markets currently rank cheaper in overall value terms. South Korea and Italy. 

tebbins

Thrugelmir said:

Only two world markets currently rank cheaper in overall value terms. South Korea and Italy. 

What's the source for that?

solidpro

mumf said:

 Because the world runs on diesel,but Boris and co. think we can do it on wind and sunshine.

Dumbest comment I have ever seen on here.

1 single turn of a new wind turbine powers my car for 220 miles. My world runs on wind and sunshine.

eskbanker

Trouble with threads like this is that there's always an element of 'lies, damned lies and statistics' by virtue of posters plucking out timescales that fit their points - we've already had mention of performance over the past year, three years, 'since 2018', five years, 'since the mid-2010s', ten years, and the perennial old favourite 1999, so it's unsurprising that such a wide range of durations will produce substantial variations in relative performance!