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How strong does the UK economy feel right now? Different people will have their own answer to that question, but I would be surprised if many said it felt 20% stronger than a year ago. But that is the increase seen during the past 12 months in the FTSE 100 index of leading British shares.
What’s going on?
Searching for value in an uncertain world
Just because the FTSE 100 has gone up by 20% does not necessarily mean that the businesses in it are necessarily worth 20% more than a year ago.
It could be that investors’ perceptions of valuation have changed, and money coming into the market has helped to close the valuation gap.
For a number of years, British shares were notably cheaper than their US counterparts. That is still the case, but the past several years have seen quite a lot of bargain hunting by global investors keen to diversify away from the US market given the country’s current political uncertainty on many issues.
Also, FTSE 100 firms actually generate much of their revenues outside the UK, even though they are listed here.
So it is not necessarily surprising that the index can do well even when the British economy is sluggish, just like the FTSE 100 might not necessarily do better even when the UK economy performs strongly.
The good news for an investor like me is that, despite the FTSE 100 moving up by a fifth over the past year, I think some of the individual shares within it continue to offer potential value.
A proven business, but a changing market
One company that has had to contend with the fallout of US moves like tariff changes over the past year is multinational distiller and brewer Diageo (LSE: DGE).
But there is more to the 16% fall in Diageo’s share price over the past year than tariffs alone.
A longer-term concern for many investors is the way the alcohol market is changing. While Diageo’s Guinness sales have grown in recent years, beer consumption more widely is in a long downwards trend.
With younger consumers less likely to choose a tipple than previous generations were, there is also a risk that demand will fall for Diageo’s premium spirits brands like Johnnie Walker and Tanqueray.
Still, the company’s portfolio of brands and unique production facilities are both large and impressive. It has a proven business model and remains highly profitable.
A falling share price has pushed the dividend yield up to 4.4%. I think investors should consider the FTSE 100 share.
My approach to bargain hunting
In fact, Diageo is only one of the FTSE 100 shares I have bought over the past year as their downward movement has bucked the wider index’s trend.
For example, I have also bought JD Sports, 7% lower now than a year ago.
I think there are more possible bargains, even as the index moves higher!
