A once-in-a-decade chance to snap up dirt-cheap FTSE 100 shares!

With analysts saying the UK stock market looks cheap, our writer shares why they think now is an ideal time to buy undervalued FTSE 100 shares.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Is now a good time to invest in undervalued FTSE 100 shares? Morgan Stanley certainly thinks so.

In fact, their analysts are confident that UK shares are the cheapest in the world at the moment. And I don’t see many reasons to doubt that.

Inflation is subsiding

A few months ago, the US investment bank told its clients that the shares are cheap because investor sentiment towards the UK is negative. But it went on to outline that the pessimism could shift provided inflation begins to decrease.

Since then, inflation has been cooling. In fact, annual inflation dropped to a 15-month low in July. According to the ONS, the Consumer Prices Index (CPI) rose by an annual rate of 6.8%, down from 7.9% in June and 11.1% in October 2022.

The Bank of England now expects inflation to fall to around 5% by the end of 2023. It then expects it to keep on falling before reaching the 2% target by early 2025.

Crucially, this means that the uncertainty in the markets caused by rising prices of goods and services could be set to subside.

Plenty of investment opportunities

FT Alphaville (the commentary service for financial market professionals created by the Financial Times) is taking a slightly more measured approach than Morgan Stanley.

Their writers stated in August that several reasons explain why London is underpriced by world standards. For example, there’s the impact of Brexit and the recent strength of the pound.

Nonetheless, they argued that some good opportunities stand out, particularly given the defensive argument for large caps and the growth-based one for small caps.

Either way, UK shares won’t stay cheap for long if the outlook for the economy is strong.

Confidence in the UK economy

At the beginning of September, the release of new data showed that the economy surpassed its pre-COVID size in late 2021.

This represents a much earlier recovery from the pandemic than previously estimated and puts the UK ahead of other major European countries.

On top of this, a better outlook for energy prices, a more resilient global environment, and continued tightness in the labour market look set to bolster the economy.

In my eyes, numerous elements conducive to a bull market are in place. And if it happens, now could be a once-in-a-decade chance to hoover up some cheap FTSE 100 shares.

Wary of value traps

However, I think it’s vital to approach this potential opportunity with caution. After all, not all cheap shares are undervalued, and some may be experiencing price declines for valid reasons.

With this in mind, I’m on my guard against falling into value traps, where stocks appear cheap but continue to underperform due to fundamental weaknesses.

As a result, careful stock selection and a long-term investment horizon will remain crucial if I’m to harness the full potential of undervalued FTSE 100 shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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