I reckon the UK stock market is screaming cheap right now. And checking what the experts say, it seems a lot of them see good value too.
The FTSE 100 is on a price-to-earnings (P/E) ratio of around 11, well below its long-term average. By contrast, the S&P 500 over in the US has a P/E of 25. The Footsie looks cheap to me.
And that’s when earnings are forecast to rise, and dividend payouts look set to reach an all-time record in the next couple of years. Well, maybe.
Not buying?
Why doesn’t everyone buy all these cheap shares, and push the prices back up?
I can see a few reasons. The key one, for me, is uncertainty. The more uncertain the outlook, the greater the short-term risk.
And that puts people off buying, especially those who went for gold or cash in recent years as a defensive move. They won’t want to risk getting back in too early.
Volatility first?
Kyle Rodda, Senior Market Analyst at Capital.com, sees another reason why shares could be volatile before any new bull run.
He points out that the forecast “level of earnings growth is at odds with a slowing economy…”.
Broker forecasts have been slowly cut back over the past year, and there has to be a good chance we’ll see more of that. So that’s more uncertainty.
Slow growth
The Economist predicts global economic growth of 2.2% in 2024. And that’s a pretty poor outlook really. To make things worse, UK forecasts for 2024 suggest only around 0.5%. Ouch.
That might not mean a weak stock market, though. If investors think 2025 and beyond will look better, they might still see stocks as cheap now and start buying. At least, those with a horizon beyond the very short term.
If there’s one key factor, I’d say it has to be interest rates. Prolonged high rates from the Bank of England (BoE), at a time when we might be very close to recession, look scary.
Falling inflation
The latest predictions put UK inflation under 2% by the spring. So might the BoE be forced to change tack and have to aim for stimulus instead? More uncertainty, again.
What about the FTSE 100 itself? There aren’t a lot of bullish predictions out there right now. But estimates seem to average around the range of 8,000 to 8,200 points by the end of the year.
I don’t take much notice of that kind of thing. But that’s not wild optimism, not by a long way.
What should we do?
I’m in the camp that thinks the UK stock market could have a few more volatile months ahead.
And until the economic outlook, earnings forecasts, and interest rates start to look like they’re pulling in the same direction, I doubt there’s much chance of sustained growth.
But, doesn’t that make it the best time to buy shares to hold for the long term? When all this uncertainty is keeping them cheap? I think so.
