Could the UK stock market be about to soar?

The UK stock market might look frothy — or cheap. That partly depends on perspective. Our writer explains his take and what he’s doing about it.

| More on:

Image source: Olaf Kraak via Shell plc

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.

Last year saw the FTSE 100 flagship of top UK shares hit an all-time high. This week, the lead index passed the 8,000 level at one point. The stock market is close to hitting record territory here.

Does it mean that shares are on a tear and we could see a new boom? Or might the opposite be true? Valuations are getting frothy and could soon fall.

I do not know what will happen next – no one does. But thinking through the options could help me as I decide how best to invest my portfolio to try and build wealth.

Possible crash on the way?

What goes up must come down, as the old saying goes. Using that as a broad principle rather than specific one in this case, we know that the stock market (like the economy) runs in cycles. Things go up, then they go down. Usually, that process repeats over the course of time.

But the timeline involved can vary from hours to decades, or more. Nor is a cycle necessarily balanced. There is never any guarantee a stock market index will get back precisely to where it once stood.

Still, when a benchmark index such as the FTSE 100 hits a new high, it does raise a question of whether valuations are stretched compared to the likely long-term value of the shares.

Reasons to be cheerful

In this cas however, I think that many corners of the UK stock market continue to look undervalued.

Take the FTSE 100 company with the highest market capitalisation as an example: Shell (LSE: SHEL). The company has a massive market-cap of £177bn. But it trades on a price-to-earnings (P/E) ratio of 12. Over the past five years, the Shell share price has moved up 11%.

Taken in isolation, neither of those facts suggests to me that Shell is obviously overvalued.

In fact, for a blue-chip company that is massively profitable, has a strong brand, owns enormous energy reserves and offers a dividend yield of 3.7% (the same as the FTSE 100 average), I think that P/E ratio actually looks fairly cheap.

Energy earnings can be volatile though. While Brent crude currently sells for over $80 a barrel, it has been half that price several times over the past decade. In 2020, it collapsed and at one point, all-be-it briefly, even fell below zero for certain contracts (meaning you literally could not give the stuff away).

While that was unprecedented, price volatility remains an ongoing risk due to factors like geopolitical concerns.

Careful selection of shares to buy

Despite that, I think Shell shares look attractively priced today (though I do not plan to buy any).

In fact, despite the FTSE 100’s near-record high, I think the UK stock market continues to offer attractive valuations for dozens or even hundreds of shares.

The market could still move significantly higher from here, in my opinion. If the economic recovery is strong enough, it could even soar in coming years – though the opposite could happen too.

The point, as I see it, is to step away from the whole index. Instead, I am hunting for bargains by considering the valuation of individual shares.

After all, that is what I am looking to snap up!

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.

C Ruane 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.

More on Investing Articles

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Investing just £10 a day in UK stocks could bag me a passive income stream of £267 a week!

This Fool explains how investing in UK stocks rather than buying a couple of takeaway coffees a day could help…

Read more »

Investing Articles

A cheap stock to consider buying as the FTSE 100 hits all-time highs

Roland Head explains why the FTSE 100 probably isn’t expensive and highlights a cheap dividend share to consider buying today.

Read more »

Investing Articles

If I were retiring tomorrow, I’d snap up these 3 passive income stocks!

Our writer was recently asked which passive income stocks she’d be happy to buy if she were to retire tomorrow.…

Read more »

Investing Articles

As the FTSE 100 hits an all-time high, are the days of cheap shares coming to an end?

The signs suggest that confidence and optimism are finally getting the FTSE 100 back on track, as the index hits…

Read more »

Investing Articles

Which FTSE 100 stocks could benefit after the UK’s premier index reaches all-time highs?

As the FTSE 100 hit all-time highs yesterday, our writer details which stocks could be primed to climb upwards.

Read more »

Investing Articles

Down massively in 2024 so far, is there worse to come for Tesla stock?

Tesla stock has been been stuck in reverse gear. Will the latest earnings announcement see the share price continue to…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Dividend Shares

These 2 dividend stocks are getting way too cheap

Jon Smith looks at different financial metrics to prove that some dividend stocks are undervalued at the moment and could…

Read more »

Investing Articles

Is the JD Sports share price set to explode?

Christopher Ruane considers why the JD Sports share price has done little over the past five years, even though sales…

Read more »