In February, Bloomberg described UK shares as “cheap and hated” and little has changed since then, with the FTSE 100 sliding to 7,267 in recent months. Its trading at the same level as a year ago.
While that hurts, it’s also a fantastic opportunity, with Morgan Stanley strategists labelling the UK stock market the cheapest in the world as “investor pessimism towards the UK is currently high”.
We’re all down in the dumps as the cost-of-living crisis rages, but I’m not letting that distract me. In fact, today’s conditions bring to mind billionaire investor Warren Buffett’s famous 1986 saying, the one about being “greedy when others are fearful”.
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Nobody loves us, I don’t care
I see today’s low valuations are an opportunity rather than a threat, and so do Morgan Stanley strategists, as they suggest “sentiment could shift if inflation starts to subside”.
FTSE-listed shares have been clobbered by today’s stubborn inflation, which is forcing the Bank of England to repeatedly hike interest rates, despite the risk of triggering a house price crash and recession.
The FTSE 100 now trades at just 8.7 times earnings, well below the 15 times seen as fair value. By comparison, the S&P 500 trades at 30.74 times earnings. If UK shares look unloved, US shares seem overloved and overvalued, largely due to the hype surrounding artificial intelligence.
I’d much rather buy UK shares at today’s bargain prices than pay too much for pricey US shares.
There are some incredible discounts on the FTSE 100. Mining giant Anglo American trades at just 5.7 times earnings, and yields 7.03%. Paper and packaging specialist DS Smith trades at 6.4 times earnings and yields 6.51%. Imperial Brands trades at 6.6 times earnings and yields 8.12%. I could go on…
Incredibly, a total of 15 stocks on the index now yield more than 6% (and in some cases a lot more than that). This is a brilliant time to be an income seeker and my number one favourite is Legal & General Group, which yields a mighty 8.71% and trades at just 5.8 times earnings. This is a profitable company, remember.
I’m on a summer buying spree
Buying shares at low valuations reduces the risk of overpaying, but I exercise caution as all too often shares are cheap for a reason. Margins may be squeezed, net debt could be a burden, rivals might be taking market share, and so on.
Yet many FTSE 100 stocks are cheap due to today’s downbeat investor sentiment, and will recover when the mood shifts. We’re not there yet though. Morgan Stanley analysts wrote that economic risks are actually rising, “with a likely challenging autumn ahead”. I think now’s a great time to buy UK shares, but I don’t expect imminent payback.
Earnings remain weak while dividend income stocks are out of favour at a time when investors favour growth. Yet when inflation starts to subside and economic sentiment climbs, they could recover at speed. Since my minimum holding period is five to 10 years, and ideally longer, I can afford to buy today and sit tight until the mood lightens.
Investors ‘hate’ UK shares, which is why I’m buying as many as I can afford today, rather than waiting until they’re popular and more expensive as a result.
