Hidden potential: a rare chance to get rich on the stock market?

The UK stock market has been a serious laggard over the past eight years. Brexit, the pandemic, and political uncertainty have all held stocks back.

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.

Middle-aged Caucasian woman deep in thought while looking out of the window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Could we soon see growth return to the FTSE 350? Well, let’s start by highlighting the dire performance of the UK stock market in recent years.

Below, I’ve compared the FTSE 100 (dark blue) and the FTSE 250 (green) with other major indices, including the Nasdaq, S&P 500, CAC40, DAX, and the Nikkei.

As we can see, the FTSE 100 and FTSE 250 are almost flat over the five-year period. Meanwhile, the other indices have grown at least 50% over the five years. The tech-heavy Nasdaq has more than doubled in value.

Created at TradingView

What does this mean?

Uncertainty isn’t good for stocks, and that’s evident when we look at the UK stock market.

The prolonged ambiguity surrounding Britain’s departure from the European Union introduced volatility and hesitancy among market participants.

This uncertainty, coupled with Britain’s slow economic growth in recent years and political upheaval, has impacted stock performance.

Investors and funds alike, cautious amid concerns about trade disruptions, regulatory changes, and the broader economic landscape, haven’t favoured the index.

And this is still the case. Particularly with interest rates rising, investors have been tempted away from risk assets, and have favoured government bonds and cash.

Things are changing

I’m by no means a perennial optimist on the state or future of the UK economy. For one, we’re experiencing developing world issues including falling life expectancy and long-term sickness as well as other issues including low levels of workforce participation.

However, there have been some positive long-term forecasts of late. These reflect the underlying strength of the UK economy and, according to one, the UK could become Europe’s largest economy within 15 years.

Moreover, a near-term boost will likely come in the form of falling interest rates. As rates fall, capital tends to move away from bonds and cash towards stocks, thus pushing up their values. Some of this change is priced in, but not all of it.

Valuations are low

There’s tons of hidden potential on the FTSE 350. Stock valuations are low compared to their peers in the US, although that does reflect the lower growth expectations in the UK.

Just look at UK banks. Barclays, Lloyds and NatWest trade with forward price-to-earnings ratio around 30-50% under the global average. While this does reflect recession concerns, the more positive longer-term economic picture isn’t factored in.

And that’s the case if we look at the index more broadly. Below, we can see the discount that the FTSE 100 has versus its American and global peers.

IndexPrice-to-earnings (P/E) ratio
S&P 50022
World index18.5
FTSE 10010

Being paid to wait

It’s by no means a given that UK stocks will surge this year. But these valuations suggest the index will see some upward moment — but that might not be for a while.

However, there’s another positive. Companies with low, or depressed, share prices tend to have higher dividend yields. So that means I can still earn money while I’m waiting for my stocks to reach their potential.

In short, I don’t see these opportunities coming around too often. Now could be a great time to pick up undervalued stocks, and hold them until their potential is realised.

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.

James Fox has positions in Barclays Plc, Lloyds Banking Group Plc, and NatWest Group. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »