The FTSE 100 Is Cheap for a Reason — and It Still Might Be Too Cheap

"European stocks are cheap" is one of the most durable claims in markets, and one of the least useful without a composition adjustment. A market made up of oil majors, banks, pharmaceutical groups and consumer staples should trade at a lower multiple than one made up of software and semiconductors. Most of the transatlantic valuation gap is that sentence.

The part composition doesn't explain

Sector-neutral comparisons still leave a residual discount — a European bank trades below an American one, a European industrial below its US peer. The usual explanations are lower domestic growth, fragmented capital markets and a shallower domestic pension bid for equities. All are real; none are new.

What has changed is the response. UK-listed large caps have leaned heavily on buybacks, which mechanically converts a low rating into a rising per-share claim on the same cash flow. For a patient holder, a persistent discount plus a persistent buyback is not the worst configuration available.

Where the UK index is actually exposed

Around three-quarters of FTSE 100 revenue is earned abroad, so sterling weakness supports reported earnings and sterling strength suppresses them. The index is a better expression of a view on global energy prices, sterling and Asian rates than on the British economy — a distinction that matters when reading UK equity commentary alongside UK macro data.