What could July have in store for the FTSE 100?

The general election could have an impact on the FTSE 100 this month. But this Fool is looking past that and buying cheap shares.

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The FTSE 100 got off to a flying start in the first half of the year. During that time, it rose 5.7%.

UK shares haven’t been the most popular with investors in recent years. But with the Footsie surging, the tide seems to be turning. That said, let’s not get ahead of ourselves. There’s the potential we could be in store for a shaky month.

The election

That’s largely due to the general election on 4 July. There’s a plenty of data out there suggesting what the FTSE 100 could do depending on which political party comes into power. For example, one snippet I saw the other day from global investment powerhouse Schroders stated that general election campaigns that look likely to have a clear-cut winner tend to lead to the Footsie rising.

The Labour Party is ahead in major political polls. That means we could see the Footsie rally this month following the election.

But of course, while polls give us a good indication of what the outcome is likely to be, there’s always the possibility of a surprise. That’s why I’m expecting some volatility.

I’m still buying

But guessing what the stock market will do in the short term isn’t a smart move. I don’t invest for a quick payday.

Instead, I’m looking for undervalued shares and I see plenty in the UK market. Take Burberry (LSE: BRBY) as an example.

There’s no hiding it, the British icon has posted a terrible performance in the last 12 months. It’s down 58.6% in that time. This year alone the stock has lost 37.3% of its value.

But with that, I’m now tempted to snap up some shares. They look cheap, trading on 11.9 times earnings. Burberry’s long-term historical average is 23. This signals to me there could be serious value to be had.

That said, its share price is down for a reason. Sales have taken a hit. Its pre-tax profit fell by 40% in 2023 from £634m to £383m. Consumer spending in markets such as the US has slowed down due to higher inflation and interest rates. Sales fell 14% in the second half of 2023.

Perhaps more worryingly, sales fell 17% year on year in Q4 in Asia Pacific, Burberry’s largest market. Looking ahead, the firm has said it expects to face further challenges in the coming months.

But as I said, I tend not to focus on the short-term outlook. And as we begin to see rate cuts later this year, I’d expect spending to pick up again. Burberry hasn’t been alone in its recent struggles. Many of its peers have also been hit as consumers tighten their belts. I’m optimistic we’ll begin to see this change in the months ahead.

Bouncing back

Burberry is a company that’s been operating since 1856. So, I believe that over the long run it can bounce back from this tough spell.

On top of that, with its share price taking a beating, the stock has an attractive 6.2% dividend yield, clearing the Footsie average of 3.6% by some margin.

That’s some juicy passive income for me to collect while I sit patiently and wait for its share price to start trending in the right direction. If I had the cash, I’d buy Burberry shares today.

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.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry Group Plc and Schroders 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.

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