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The FTSE 100 index of leading British shares has hit a record high this week.
Since the start of the year, the index has moved up by 9%. That may sound modest, but it is slightly better than the 7% recorded so far this year in the US by the S&P 500.
However, could the FTSE 100 be getting ahead of itself? If so, now might be a good time for me to allocate more of my portfolio to S&P 500 stocks instead of UK shares.
The UK market could still be cheap
Actually, I am not sure that now is a particularly good time to load up my portfolio with S&P 500 shares.
There are some practical reasons for that.
As a British investor, I know more about businesses on this side of the pond. Like Warren Buffett, I aim to stick to my “circle of competence” when buying shares. I do own some American S&P 500 shares, but aside from well-known businesses, it can be easier for me to get a handle on a FTSE 100 firm than an American one.
As a foreign investor in the US market, currency movements could also work against me – and the dollar has been volatile this year. The reverse is also true, in fairness: such exchange rate shifts might work in my favour.
But the main reason keeping me from buying more S&P 500 shares than FTSE 100 ones for my portfolio right now is the simple one of valuation.
The FTSE 100 index trades on a price-to-earnings (P/E) ratio of around 15, compared to around 29 for the S&P 500.
Here’s how I’m hunting for bargains
Now, a P/E ratio is only one tool when it comes to valuation.
Earnings can fall. A high debt load might mean that even with a low P/E ratio a stock is a value trap.
On top of that, a lower P/E ratio for the FTSE 100 overall compared to the S&P 500 does not mean that individual shares within it necessarily have attractive valuations.
That said, I think some do. For example, one FTSE 100 share I think investors should consider at the moment is insurer Aviva (LSE: AV).
It might not seem like an obvious bargain. This week the Aviva share price hit its highest level since the 2008 financial crisis.
However, I see it as a well-run, profitable company with a proven business model and significant cash generation potential. That helps it to fund a generous dividend, with the yield currently standing at 5.6%.
Aviva reduced its dividend per share in 2020 but has since been growing it steadily. It was the UK’s largest insurer even before its recent Direct Line acquisition and has strong brands and long underwriting experience.
I see integrating Direct Line as a risk. Its performance had been shaky in the years before the takeover and the merger integration may soak up a lot of time from Aviva executives. Over the long run, though, I see Aviva as a company with ongoing potential.
