It seems odd talking about a market rally while FTSE 100 stocks are sliding rather than rising, but that’s how these things work. When buying shares, what matters isn’t how the market is doing today, but where it’s going tomorrow.
UK shares are unloved right now. After spiking to an all-time high of just over 8,000 in February, the FTSE 100 has retreated to around 7,365. That’s disappointing, and the UK’s lack of exposure to tech stocks is partly to blame, because the sector is booming again.
Getting ready for the rally
New York’s Nasdaq is up a third this year, with valuations driven to dizzying highs by the hype around artificial intelligence (AI). Sadly, we don’t have a home-grown version of chip-maker Nvidia, but the FTSE 100 does contain companies that are exposed to the red-hot AI trend. Analytics specialist RELX is up 17.27% measured over one year, while accounting software specialist Sage Group is up 42.42%.
The index contains its share of high fliers in other sectors. Rolls-Royce is the best performer on the index measured over 12 months, soaring 89.44%. Flutter Entertainment is up 87.61% over the same period, with 3i Group up 70.96% and Centrica up 61.91%.
Inevitably, it contains losers too, with housebuilder Persimmon down 44.67%, Vodafone falling 42.69% and BT Group down 34.49%.
Overall, performance has been a disappointment, but I see that as an opportunity. I would rather buy dirt-cheap FTSE 100 stocks today than throw money at the overpriced US market, which has probably done too well for its own good.
As AJ Bell recently pointed out the S&P 500’s market-cap is near an all-time high, relative to the rest of the world. The last time this happened, it started underperforming as tech valuations proved unsustainable. Almost unnoticed, the process has begun, it says.
While I’m as dazzled by Apple, Nvidia, Tesla and the other big tech stars, I don’t think now is the time to buy them. The opposite looks true with my favourite FTSE 100 shares.
Am I brave enough to buy?
Barclays, for example, now trades at just 4.9 times earnings, yielding 4.83%. Paper and packaging group Smurfit Kappa Group is on sale at seven times earnings and yields 4.49%. Housebuilder Taylor Wimpey is dirt cheap trading at 5.4 times earnings, while the yield is a dizzying 9.2%.
All three have been brought low by concerns over the UK economy, as inflation proves sticky and the outlook remains downbeat. Individually, Barclays was knocked by the banking crisis, Smurfit Kappa by higher costs and cash-strapped online shoppers, and Taylor Wimpey by house price crash fears.
The strong pound has also weighed on the FTSE 100, as companies on the index generate more than three quarters of their revenues overseas. These are now worth less money when converted back into sterling.
While stock market performance is unpredictable, the FTSE 100 should rally when the Bank of England gets on top of inflation and interest rate expectations retreat. The early stages of a rally are typically the most lucrative.
That’s why I’m buying shares today while they’re struggling and cheap, rather than waiting until they’re flying and a lot more expensive.
