Here’s a quick summary of the UK’s blue-chip FTSE 100 index highs and lows over the past 12 months:
For the record, the FTSE 100 is just 2.7% below its 52-week high, hit on 10 February. Two weeks later, Russia invaded Ukraine, sending global stock markets into meltdown. At its 2022 low on 13 October, the index had slumped to just over 6,700 points. Since then, it has rebounded strongly, rising 11.5% from last month’s low. Impressive stuff.
To me, the FTSE 100 looks unloved and undervalued
Earlier this year, the valuation of the FTSE 100 versus other major stock markets had widened to an all-time high. Thanks to a combination of social, political, and economic events, global investors were heavily underweight UK shares.
Back then, it seemed like no-one wanted to buy unloved and undervalued London-listed stocks. And that’s when my wife and I piled in, buying a total of nine new shares (six from the FTSE 100 and three from the mid-cap FTSE 250 index). Most have shown early promise so far — and we have high hopes for their future returns.
Right now, the Footsie still looks cheap to me. It trades on a price-to-earnings ratio of around 14 for an earnings yield of 7.2%. This is much cheaper than these valuation measures for the US S&P 500 index (19.2 and 5.2% respectively). But history shows that the US economy and corporate earnings grow faster than their UK equivalents, hence US stocks tend to be more highly rated.
Likewise, the FTSE 100 offers a dividend yield of 3.8% a year, more than double the S&P 500’s 1.7% yearly cash yield. But US companies tend to reinvest their earnings into higher growth, whereas UK shares offer some of the highest cash yields worldwide.
What next for the Footsie in 2023?
Investors in large-cap UK shares can breathe a sigh of relief, having avoided the worst of the market crashes seen elsewhere this year. For example, the S&P 500 is still down nearly a sixth (-16.4%) from its January 2022 high. But what next for the UK’s leading stock index?
I shall make three tentative predictions for next year. First, the index will continue to be volatile in 2023, zig-zagging about in response to fiscal, monetary, and political events. Daily high-low movements for the FTSE 100 over the past 12 months average 1.3%, with the peak being 4.1%. I expect this daily volatility to be broadly similar in 2023.
Second, I suspect that at some point in late 2023, the FTSE 100 may exceed its 2022 high. But that might not happen until the later stages of next year, perhaps when economic growth resumes following a much-anticipated contraction. And if things go really well, the index may even beat its all-time high of 7877.45 points, hit on 22 May 2018.
Third, I think that things will get worse before they get better. In other words, I’m expecting the FTSE 100 to fall a fair way from this point. For me, its 11.5% rise from last month’s low is too optimistic — too much, too soon. Hence, I’m not expecting much of a ‘Santa rally’ this year. Nevertheless, I will keep buying cheap UK shares for their generous dividends and future capital gains!
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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we, believe that considering a diverse range of insights makes us better investors.