If I had a lump sum of £5,000 to invest today, I would buy UK shares. I think the UK market is incredibly undervalued right now. Investor sentiment towards British companies has deteriorated over the past five years.
However, this is not reflected in these companies’ fundamentals. In my opinion, many corporations are in a stronger position today than they were five years ago. Unfortunately, the market does not seem to think so.
As such, if I had £5,000 to invest for 2021, I would look to take advantage of this discrepancy. And there are a couple of companies in particular that I would focus on buying.
How should I invest in UK shares?
One sector that I believe is significantly undervalued is the oil & gas sector. It is easy to understand why investors have been avoiding UK shares in this industry over the past few years. The price of oil has crumbled, and profitability in the sector has declined. At the same time, businesses are coming under pressure to reduce their carbon footprint. This has led some analysts to speculate that the oil & gas industry is on the way out.
I disagree. While I do believe the world is moving away from dirty fuels, the globe still consumes around 100m barrels of oil every day. It will take time for that to change.
That’s why I’d back Royal Dutch Shell and BP at current levels. Both of these UK shares have large oil and gas operations. They are also investing billions in renewable energy. This should help them change with the times. And while they move to a greener asset base, both companies offer mid-single-digit dividend yields.
Undervalued property
As well as the oil and gas companies outlined above, I’m also taking a closer look at real estate investment trusts. UK shares like Great Portland Estates and Landsec have seen the value of their shares plunge in 2020. As commercial property values have fallen, investor sentiment has changed rapidly.
Nevertheless, recent trading updates from both groups show their asset values have only declined modestly. This discrepancy between the companies’ stock price and underlying fundamental performance is, in my opinion, something to take advantage of, which is why I’ve been eyeing up the shares.
As the UK economy begins to recover in 2021, I reckon these two companies could see a sudden surge in investor interest.
High-risk, high-reward
I think the UK shares listed above are relatively low-risk investments. However, when it comes to IAG, this is not a holding for the faint-hearted. One of the world’s largest airline groups, the company has struggled to stay solvent in the coronavirus crisis.
Still, it seems to have made it through in one piece. As the economy starts to recover, IAG has a good opportunity to take market share and return to profit. If it can pull ahead of the rest of the pack, I reckon the stock may be a good investment for 2021.
