Are shares on the London Stock Exchange (LSE) cheap now? Well, it does look like we’ve had a lost decade for LSE shares.
Over the past 10 years, FTSE 100 shares have gained only 13%. I’d say that’s pretty pathetic. The smaller stocks in the FTSE 250 have done better, with a 29% rise. But over 10 years, that’s still poor.
There are good reasons for LSE shares to be down right now. We have, after all, just gone through the Covid pandemic. And now we face inflation and interest rate pain.
Third best year
But I reckon the doom and gloom is worse that it should be, and the outlook for the stock market is healthy
In fact, 2023 looks set to be the third best year on record for FTSE 100 cash. Adding up forecast ordinary dividends, and share buybacks already announced, the total comes to more than £120bn.
Forecasts carry risk, of course. But this total doesn’t include any more buybacks to come, or any special dividends.
It leaves out returns from FTSE 250 stocks too, and from any of the smaller-cap ones. So the total returns from LSE shares could be pretty tasty this year.
Oh, and analysts think 2024 will turn out to be an even better year than 2023.
Dividend yields
What other things make me think LSE shares are good value in 2023? Firstly, there are some top dividend yields on offer this year.
When investors turn away from stocks and shares, investment managers themselves can suffer share price weakness. And that can drive dividend yields up.
Shares in M&G, for example, have faltered since being spun off from Prudential in 2019. But that’s helped push the forecast dividend yield above 10%. The City thinks it’s going to stay there too, at least as far as 2025.
Dividend risk
Now, firms often cut their dividends when the pressure is on. And I’d say that’s one of the big risks of the next few years.
Sometimes also, a big dividend can be a sign that the market expects poor performance from a stock. And so investors have sold and pushed the share price down.
But I use high dividends as a starting point to find shares that I think will hold up in the decades ahead.
Low valuations
There are some very low price-to-earnings (P/E) valuations around too.
I can understand why bank shares might be down now. But we’re looking at a Lloyds Banking Group P/E of around six, which seems super low. Barclays looks even cheaper, on a P/E of five.
Guess which sectors are forecast to lead the earnings growth from FTSE 100 shares this year? That’s right, banks and other financial stocks.
Short-term risk
We do face some stiff short-term risk in the next year or two, surely. But for those of us investing for the long term, I think this year might indeed turn out to be the best time in the past decade to buy LSE shares.
