Shares on the London Stock Exchange haven’t had the best time in 2023 thus far. Britain’s premier index in the FTSE 100 has had a volatile time and only a flat performance to show for it. But considering its depressed valuation, it could be a once-in-a-decade opportunity to buy UK shares and get rich.
Brexit breakup
This year could offer a rare chance to snap up UK shares on the cheap. Analysis shows that valuations of British stocks are significantly under their historical averages with the potential to present double-digit returns in the medium term.
The FTSE 100 currently trades at a steep discount versus global peers. This is because economic uncertainty related to the impacts of Brexit has spooked many investors away from the UK.
Valuations in UK shares plunged after Brexit and haven’t recovered since. From 2007 to 2016, UK shares largely moved in line with global markets. However, Brexit has since created long-term uncertainty around the economic activity and competitiveness of the UK.
Part of the reason for this is that investor interest in UK shares has steadily declined since 2016. This has seen the valuation gap versus other markets expand further. What’s more, ongoing political chaos has further dampened appeal, with higher taxes and slower growth not helping sentiment either.
Juicy returns for UK shares?
Nonetheless, most of this negativity appears to have already been priced in. According to UBS, the FTSE 100 currently trades at a 20% discount to its historical average. And while overall earnings are forecast to fall this year, the UK’s flagship index is still attractively priced for future earnings growth.
Major UK companies continue offering large share buybacks and dividends too. Despite the current macroeconomic uncertainty, dividend yields are averaging a robust 7% — levels not seen in well over a decade.
But perhaps more lucratively, UK shares offer a potential 9% real annual return for long-term holders, according to analysts at Saxo Bank. Assuming 3% inflation, the total nominal return could reach 12% yearly. That said, these projections rely on the historical valuation gap closing and inflation stabilising.
The UK market weakness brings opportunity alongside short-term volatility. But if investors can look past the current gloom toward sunnier horizons, substantial profits could await down the road. This year may test nerves but ultimately reward those who hold strong.
Buy low, sell high
The long-term outlook for UK shares hinges on political stability and steady inflation. Significant risks are present, but pessimism can also create buying opportunities. Therefore, with valuations depressed, upside potential appears substantial if conditions improve.
Excess savings and strong employment could continue supporting consumer discretionary shares like IAG and easyJet. And although UK banks such as Lloyds and Barclays face margin pressures, they remain highly profitable and are ramping up shareholder payouts.
It’s difficult to predict exactly when sentiment and valuations will recover. But investors who are able to stomach volatility could find 2023 as a rare and ideal time to start accumulating UK shares while they’re dirt cheap.
Years from now, this period may be viewed as a rare chance to buy low and sell high. Although the present feels gloomy, the future looks bright given the upside potential for many stocks and the ever-growing shareholder returns.
