Three things make me think this is a great time to start buying shares in the FTSE 100.
Yes, I know we’re facing 10% inflation and a tough economic outlook. Thousands of investors have sold their shares and bought gold, as well as other things they think are safer. But that’s all part of my reasons for buying now.
Shares are cheap
The idea of buying shares when they’re cheap and selling them when they’re expensive seems obvious, right? It’s surprising how many people manage to achieve exactly the obvious.
That’s what people selling their shares today after they’ve fallen are doing. Still, whatever has happened to share price charts, it’s valuation that counts. And looking at price-to-earnings (P/E) ratios, I’m seeing shares that I rate as very good value.
The P/E is only one measure, and it shouldn’t be used alone. But when I see Lloyds Banking Group on a forecast P/E of under seven, I see a buy. That’s only about half the FTSE 100’s long-term P/E valuation, and I think it’s too cheap.
Taylor Wimpey is on a forecast P/E of only around 6.5. Rio Tinto shares have dipped, as global demand slows and the miner has cut its dividend. But its P/E of under six looks too low to me.
Dividends are high
Dividends are rising. The FTSE 100 paid out an all-time record of £85.2bn in 2018, before Covid struck. After subsequent events, I thought it would take a few years to get back to that kind of level.
But no, the City’s analysts are predicting £85bn in dividends for this year. There must surely be a decent chance of beating that 2018 record already, so early in our recovery after the pandemic.
Does that sound like 2022 is a time to sell shares and go stuff our mattresses with cash? I don’t think so. I think it’s a great time to nail down some of those great dividend yields.
Banks look set to pay around 5%, with plenty of cover by earnings for safety. Some insurers look even better, with Legal & General on a forecast 7.5%. Imperial Brands offers something similar. And even National Grid‘s forecast yield is up to 5%.
Footsie over 7,500
“The time of maximum pessimism is the best time to buy,” said Sir John Templeton. And Warren Buffett has urged us to be “greedy when others are fearful.”
Now, it’s hard to tell when sentiment is at its lowest. But sometimes, I think one of the best indicators might be seeing it start to turn. As I write, the FTSE 100 has ended above 7,500 points for four out of the past five market days.
Are we’re past the point of maximum pessimism? I don’t know. But buying when everyone is selling is often a very good long-term strategy. And signs of improving sentiment can suggest the rout is turning.
Any of these things could go wrong in the short term. Share values could fall further. Dividend yields might reverse. And stock markets can fall again. But I’m convinced that the odds are strongly on the side of the long-term investor right now.
