Is FTSE 8,000+ the turning point for UK shares?

On Tuesday 23 April, the FTSE 100 hit a new record high, in a St George’s Day celebration. But I think the UK index could go well beyond the 8,000 mark.

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Until this week, the record high for the FTSE 100 was 8,047.06 points, recorded on 16 February 2023. But earlier this week, the FTSE broke through this barrier.

Footsie fired up

On Tuesday, the FTSE hit a new high of 8,076.52, before retreating. At this point, the index stood 11.9% above its 52-week low of 7,215.76 on 18 August 2023.

What’s more, in a recent reversal of a long-term trend, the Footsie is beating the S&P 500. The UK index is up 1.6% in a month, versus a 3% drop for the US index.

Still, the FTSE trails its US cousin over longer periods, with the S&P 500 leaping 72.1% over five years, versus 8.3% for its British rival. No wonder global investors prefer US stocks to UK shares.

The London market still looks cheap

Despite recent strength, the FTSE 100 looks cheap to me. It trades on a multiple of 14 times earnings, delivering an earnings yield of 7.1%. This is perhaps a third cheaper than the global stock market excluding the UK.

Also, the UK index offers a dividend yield nearing 4% a year — way higher than the yields on offer from other major markets. This cash payout is covered 1.8 times by historic earnings, for a reasonable margin of safety.

In short, in both geographical and historical terms, the Footsie looks undervalued to me. Hence, I hope that the London market will keep making higher highs, following years of weak gains.

Then again, some cautious investors are put off by record stock prices. However, a century of US data shows that buying at market peaks often pays off. In fact, returns have been higher in the year after stock markets reached new highs than after years with no new peaks.

One cheap Footsie stock

Talking about cheap UK shares, I view Lloyds Banking Group (LSE: LLOY) as among the best bargains. Alas, Lloyds shares have been a big disappointment since the global financial crisis of 2007-09.

Even so, the Black Horse bank’s stock has enjoyed a recent revival. As I write, it stands at 51.34p, valuing the group at £32.6bn. Over one year, this share is up 5%, but it has lost 18.5% over five years.

Furthermore, the share price is 30.2% above its 52-week low of 39.42p, hit on 24 October 2023. And it’s been even higher this month, peaking at 54.28p on 8 April.

My wife and I own this stock in our family portfolio, paying 43.5p a share in June 2022. So far, we are up 18.1%, excluding dividends. But I hope for more, as this stock looks undervalued to me.

Lloyds shares trade on a multiple of 6.8 times earnings, producing an earnings yield of 14.6%. Therefore, their market-beating dividend yield of 5.4% is covered over 2.7 times by historic earnings. This looks like a bargain buy to me.

That said, I fully expect British banks’ earnings to fall in 2024, driven down by rising bad debts and loan losses. Also, credit growth is slow and the housing market isn’t strong. Nevertheless, we will hold on tightly to our Lloyds stake for the long run!

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.

Cliff D’Arcy has an economic interest in Lloyds Banking Group shares. The Motley Fool UK has recommended Lloyds Banking Group. 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.

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