When cheap markets meet favourable conditions, sentiment flips very quickly

London’s stock market is cheap — some sectors, even cheaper. Given a change in sentiment, the uprating could be substantial.

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.

Newspaper and direction sign with investment options

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.

The latest GDP figures, for the fourth quarter of 2023, told many of us what we already knew: the UK economy is fairly stagnant. And with a fourth-quarter drop of 0.3% combined with a 0.1% third-quarter fall, the UK is now technically in a recession.

Granted, not by very much. And indeed, over 2023 as a whole — and not the final six months — the economy actually grew by 0.1%.

But annual growth of 0.1% is equally nothing to get excited about, just as a fall of 0.4% or so is hardly a harbinger of doom. Either way, though, the point is that prime minister Rishi Sunak’s promise of economic growth isn’t being met. We’re just flatlining, essentially.

What we need is a feelgood factor

A few weeks back, I really wasn’t sure that now was the time to place a bet on the economy, and on London’s stock market. America’s economy, and America’s stock market, looked more attractive.

My argument then was any economic stimulus would happen the other side of the general election that must take place in the next twelve months. Until then, the economy was just treading water.

Now, I’m not so sure. Don’t get me wrong: America is still attractive. But one way or another, it’s likely that a fresh government would provide some certainty and confidence that the drift of the last couple of years might come to an end.

Put another way, commentators are talking up the similarities between now and 1997, when Labour under Tony Blair won the general election. And yes, the two elections are indeed comparable

But think back to what happened after the election — a sharp increase in feelgood factor, as people saw a government emboldened to act. Think of Gordon Brown’s decision to make the Bank of England independent, for instance, freeing it from political interference when it came to setting interest rates.

Boom times over the Atlantic

Investors have hardly been enthusiastic about UK equities over the past several months. The Investment Association has been reporting net outflows from UK equity funds, with the withdrawn cash being reinvested in fixed-income funds and short-term money market funds.

The reason isn’t difficult to figure out. Look at the FTSE 100’s five-year performance: over five years, it’s up just 6.8%. To save you doing the maths, that’s an annual compound growth rate of 1.7% — hardly stellar stuff.

America? Over five years, the broadly-based S&P 500 (a far more representative index than the Dow Jones Industrial Average) had risen just over 80%. That’s an annual compound growth rate of 15.9%.

And again, to save you doing the maths, that means that the S&P 500 has outgrown the Footsie by over nine times.

No wonder, once interest rates began rising, fund managers started switching out of equities into fixed income funds: they need quarter-on-quarter growth rates to report to their investors.

Where the bargains are

But ironically, that’s just what they could start to see in the coming months. As I said, this economic drift will not persist forever. And frankly, it’s difficult to imagine that a change of government might make things actually worse.

Although, come to think of it, that’s more-or-less exactly what happened when Boris Johnson was replaced by Liz Truss: markets tanked, spectacularly.

But we’ve got more than just hope to rely on. The facts — and one fact in particular — go in investors’ favour as well.

The UK stock market is cheap. The FTSE All-Share index is on a price-to-earnings ratio of 11.9. The FTSE 100, a price-to-earnings ratio of 10.8. The FTSE All-Share Financial sector — containing 256 companies — is on a price-to-earnings ratio of 9.1. The FTSE All-Share Basic Materials sector (21 companies), 6.7. The energy sector (15 companies), 6.5.

And so on, and so on. America’s S&P 500? 22.8. The Dow Jones Industrial Average? 25.7.

1997, redux

In short, I think we may have seen this movie before.

The next few months could well be torrid. But it’s not going to take a massive shift in sentiment for the market to turn: when cheap markets meet favourable conditions, sentiment flips very quickly. And elections — and changes of government — have a handy knack for delivering that change in sentiment.

And with the price-to-earnings ratios mentioned above, I know where I’ll be looking.

Take it from me.

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.

More on Investing Articles

Investing Articles

1 no-brainer pick I’d love to buy for my Stocks & Shares ISA!

A Stocks & Shares ISA is a great investment vehicle for our writer. Here she explains why, and one stock…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Just released: our 3 best dividend-focused stocks to buy before May [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Will the Rolls-Royce share price keep rising in 2024?

With the Rolls-Royce share price going on a surge, this Fool wants to look forward to where it could potentially…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d target a regular £30k+ second income stream

Reliable dividends can help provide a lot more financial freedom. Here's how I'd aim for a substantial second income inside…

Read more »

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

Lloyds share price hanging on to 50p ahead of Wednesday’s Q1 earnings report. Where to now?

Down in April and with low earnings expected this week, Mark David Hartley investigates where the Lloyds share price might…

Read more »

artificial intelligence investing algorithms
Investing Articles

Everyone’s talking about AI! Here’s 1 FTSE stock to consider buying for exposure

A hot topic right now is artificial intelligence (AI). This Fool explains how this FTSE stock could offer investors an…

Read more »

British Pennies on a Pound Note
Investing Articles

1 penny stock I’d buy today while it is 99p

Ben McPoland highlights Windward (AIM:WNWD), a fast-growing penny stock that could benefit from the artificial intelligence revolution.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This forgotten FTSE 100 gem could be the best bargain on the stock market

The FTSE 100 is full to the brim of high-quality businesses. But this Fool has his eye on this 'forgotten'…

Read more »