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The FTSE 100 is up 1.36% this week, while the S&P 500 has fallen 0.7%. And this is just the latest update in what has been quite a run for UK stocks against their US counterparts.
A stopped clock is right twice a day. But the FTSE 100’s recent outperformance isn’t just a case of being in the right place at the right time – there’s a deeper structural reason to take note of.
Diversification
It’s no secret that the S&P 500 has a much heavier concentration in tech stocks than the FTSE 100. And that’s been a huge advantage over the last few years, but the situation has changed recently.
Artificial intelligence (AI) has been a big challenge for the US index. On the one hand, investors are concerned that demand isn’t strong enough to justify the ongoing investments in data centres.
On the other hand, there are concerns that existing software companies are about to see their competitive positions threatened by AI startups. So there’s been pressure here as well.
The FTSE 100 hasn’t been entirely immune to this – it’s had its share of fallers. But nobody’s complaining about the index having a relative lack of tech exposure at the moment.
One good week doesn’t make up for years of relative underperformance. The latest moves, though, mean the total returns from the FTSE 100 and the S&P 500 are roughly level over the last five years.
So where should investors look for opportunities right now? Have US stocks fallen enough to become cheap, or are UK shares finally picking up some momentum?
Where to look?
I think there are opportunities on both sides of the Atlantic. And building a diversified portfolio means looking to take advantage of both when chances to do so present themselves.
One example is Bunzl (LSE:BNZL). The FTSE 100 company is a distributor of consumables such as coffee cups, cleaning supplies, and carrier bags.
It doesn’t sound like an exciting business and organic growth has been limited recently, but the firm has an outstanding track record of growing through acquisitions. And it’s unusually good at this.
This can be risky – there’s always a danger of paying too much in a deal and even the best investors have made mistakes. But Bunzl has an unusually strong investing discipline.
Where other firms have started paying higher multiples, Bunzl has stuck to valuations of around eight times EBITDA (earnings before interest, tax, depreciation, and amortisation). That doesn’t guarantee good returns, but it gives the company the best chance.
Exposure to the weakest parts of the US economy combined with some unforced errors have caused the stock to crash 38% in 12 months. But I think it’s well worth considering at today’s prices.
Long-term value
I think Bunzl is a great example of a fundamentally strong business dealing with some temporary challenges. But I expect the firm to fare much better over the long term.
If I’m right, the current share price could be a really nice buying opportunity. And I also think there are similar opportunities in a number of US stocks that have fallen recently.
