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Over the past few months, I have bought some US shares. But I have been more active in the London market, snapping up UK shares.
There are a few reasons why, as a general rule, I am keener to buy UK shares than US ones right now. Here are three of them.
1. Sticking to what I know
Billionaire investor Warren Buffett always aims to stay inside what he calls his ‘circle of competence’ when investing.
Sticking to what you know and understand can make it easier to assess a business. So, although I feel comfortable assessing some US businesses, in general UK firms are more likely to be inside my circle of competence than US ones.
If I want to check up on what Greggs or Tesco is doing in person, I can walk there. For Chipotle Mexican Grill or Walmart, it is a different story.
2. Exchange rate fluctuations
Investing in US shares as a UK-based investor can involve a number of complications.
Tax is one. But exchange rates can matter too.
Sometimes they have worked to my advantage: a weak US investment did better for me because the exchange rate went in my favour between buying and selling.
But that can work in the other direction too.
Exchange rates have been volatile this year and I think that could persist. Buying UK shares does not directly expose me to that (although exchange rate movements could still factor into the business results of multinational companies).
3. Hunting for bargains
Another reason I have been buying UK shares over US ones lately is that I think the London market has a number of potential bargains in it.
Of course, that could be true in the US market too. But currently, the US S&P 500 is trading on a price-to-earnings (P/E) ratio of around 29. Against that, the FTSE 100’s P/E ratio of 16 looks cheaper to me.
A P/E ratio can only ever tell part of the story. How likely are future earnings to match current ones, for example – and how much debt does a company have that may swallow up earnings?
Still, I do think the London market has some potential bargains in it.
For example, last week I bought more shares in JD Sports (LSE: JD).
With its large US footprint, by the way, it is an example of what I mentioned above about UK shares being exposed to exchange rate movements within their business.
Another risk I see for JD is weakening consumer confidence, potentially hurting customers’ enthusiasm to splash the cash on pricey trainers and sportswear.
Still, the JD Sports share price has tumbled 29% in a year and is now just 9 times earnings.
Yet it has a strong brand, global reach, proven business model and is highly cash generative. It looks like a long-term bargain to me, which is why I have been adding more JD Sports shares to my portfolio.
