Many investors may be surprised to hear that a stock market recovery is currently under way. The media headlines continue to be pessimistic about a looming recession, rising interest rates, and the ongoing cost-of-living crisis. And while these are valid concerns, the data is starting to show that the situation may not be as dire as many people think.
In fact, since October 2022, the FTSE 250 is up by over 15%. And across the pond in the US, the S&P 500 has climbed almost 20% to a new 52-week high.
On recently revising its guidance, the International Monetary Fund (IMF) no longer anticipates the UK entering into a recession in 2023. And this is a conclusion now shared by the OBR, PwC, EY, the Bank of England, and countless other financial institutions.
Despite this, the FTSE 250, and many other indices, are still below pre-correction levels. Therefore, investors still have the opportunity to capitalise on the tailwinds of the stock market recovery by buying top-notch cheap shares today.
Where to find the best undervalued stocks
A common misconception is that ‘cheap’ stocks have a low share price. In reality, a stock priced at 1,000p a share may be far cheaper than one at 100p. Determining whether a company is undervalued isn’t based solely on price but rather on price relative to the intrinsic value of that business.
Value investors are constantly looking for a mismatch between the market capitalisation of a company and its underly value. During a bull market, finding such opportunities can be quite challenging.
Corporate valuation is a time-consuming and meticulous process involving analysis, forecasting, and modelling. However, when pessimism is high, spotting bargain buying opportunities becomes a lot easier.
So where are they? Probably in the industries where investor sentiment is the weakest. And as strange as it may sound, that most likely includes the technology sector.
A lot of excitement and hype is building up around AI stocks. But other segments within this industry contain companies with healthy balance sheets and generating excessive cash flow.
Similarly, the real estate sector looks like a promising place to search. Rising interest rates make mortgages more expensive, raising the cost of debt for REITs. Yet plenty of businesses are delivering growth in rental income and shareholder dividends, despite their stock prices falling.
When will the stock market recover?
Buying cheap shares today doesn’t guarantee spectacular returns tomorrow. Value investors need to be patient and wait for the rest of the investing community to realise the same thing. This process may take a few weeks or months but, in some cases, it can take years.
With more positive data steadily being fed into the financial markets, the level of investor fear appears to be subsiding. At least that’s what the upward trend of the UK’s flagship indices would suggest over the last couple of months.
This could mean the stock market may be set to completely recover before the end of 2023. Obviously, there’s no guarantee. But if this is the case, investing today could unlock substantial wealth for many years to come.
