After a bumpy few years, the world has fallen out of love with UK shares. But I take a different view. I’ve been embracing them with all my might in recent months, picking up one FTSE 100 bargain after another. I believe my strategy will pay off over time.
While recent performance has been disappointing, a heap of UK stocks now look amazingly cheap and offer ultra-high yields too. I want to scoop them up before the rest of the world spots the opportunity.
I’m not alone. Jason Hollands, managing director of fund platform Bestinvest, fears investors risk getting carried away by US tech stocks success, which has driven the S&P 500 towards all-time highs.
Things will get better (hopefully)
Hollands suggests shunning the likes of Nvidia and Tesla amid “ballooning valuations” and buying “unloved UK shares instead”. He admits the UK faces severe headwinds from inflation, rising borrowing costs and higher taxes, but notes that “doom and gloom predictions by the Bank of England and a slew of international organisations have proved overly excessive”.
Britons have really had it in for ourselves since Brexit (and we’re not the only ones). Also, the FTSE 100 has faced specific problems. It can’t compete with the US on tech, and never will. It’s strong on traditional sectors such as banks and miners, but these have underperformed.
As a result, UK equities now trade at just 10.2 times forecast earnings, Hollands says, a massive discount to global equities, which trade at 16.9 times.
This looks like a brilliant opportunity for someone like me who loves buying undervalued shares. Simon Gergel, manager of The Merchants Trust, says UK valuations are hovering around 20-year lows. He’s a keen buyer, too, noting that “investment returns are often linked to the price you pay for the assets”.
Just look at LSE yields
I should point out that UK shares have looked cheap for ages, without recovering their lost value. The most obvious example is Lloyds Banking Group, whose share price has gone nowhere for about 15 years. Over the last 12 months, it’s up just 3.42%.
Yet I’ve been buying Lloyds because I see hopes of a recovery as interest rates fall, house prices stabilise and the world wakes up to the UK. If interest rates fall as expected in 2024, savings rates and bond yields will follow. The search for yield will be on again, and here the UK has a real edge.
The FTSE 100 as a whole now yields around 3.9%, while share buybacks will add to the total cash return in 2024. Lloyds is forecast to yield 5.8% in 2023 and 6.45% in 2024. More than a dozen stocks on the index already yield 6% or more. Now looks like a good time to consider buying them.
The next year will be bumpy. The cost-of-living squeeze will drag on, even as inflation falls. An election will add to the uncertainty. I can’t say when UK shares will rally, but I want to own as many as I can when they finally do.
