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The UK stock market had a decent run in 2024. If investors put money into the FTSE 100 at the start of the year, they would have gotten a 5.6% return. The FTSE 250 narrowly underperformed, generating 5%.
However, UK indexes have a long history of underperforming their US counterparts. The S&P 500, for example, returned 25.9% to investors last year.
Investors should note that UK shares and indexes tend to have higher dividend yields. This could alter the total returns. Moreover, there are foreign exchange effects to take into account.
But there’s no doubt in my mind that US stocks outperform UK ones.
What’s causing this?
The main reason UK companies underperform is because of low valuations. The price-to-earnings (P/E) ratio for the S&P 500 is 29.8, whereas the UK stock market has a humbler P/E ratio of 15.8.
An explanation for this is that UK companies lack innovative and exciting companies. The Footsie is dominated by companies in financial services, banking, oil, mining, etc. Meanwhile, US companies are much more tech-focused and exhibit significantly higher growth.
While companies such as Rolls-Royce are bucking the trend, returning 93.5% last year, these are the exception rather than the rule. With the UK economy contracting in October, and the CBI reporting low expectations for it next year, I think UK companies will continue to underperform.
However, there’s one FTSE 250 company I own shares in, and I plan to expand my position in it next year.
Steaming ahead!
I want to preface this section by noting that diversification is important for investors. It allows them to spread their risk over a few companies. My portfolio is balanced as I also own a few US stocks.
With that said, Trainline (LSE:TRN) is my favourite UK share right now.
It had an exceptional 2024, with its shares rising by 36%.
I like the company because its rail app is taking advantage of the shift in the digitisation of train tickets. As Europe’s most downloaded rail app, it’s in a prime position to benefit from a paperless rail economy.
The firm is also experiencing strong growth, with sales climbing by 17% year on year in the last quarter.
However, I’m most excited about its growth prospects in international markets. It operates in over 40 countries (mostly in the EU). However, net ticket sales from this segment are only £583m, compared to £1.97bn in the UK. Considering the EU’s population of 449m dwarfs the 69m people in the UK, there’s a great opportunity for strong long-term growth in this market.
There’s already strong evidence that it’s becoming successful in this pursuit. Net ticket sales in Spain and Italy increased by 23% year on year in the last quarter.
One key risk for the business is low carrier competition, as the rail app’s usefulness diminishes. This is because consumers no longer benefit from the price comparison the app provides.
However, I’m still optimistic about the future of the rail company. I may buy more UK stocks as the year progresses, but for now, I’m happy to keep my exposure limited to Trainline.
