It’s no secret that many FTSE shares have been in the bargain basement for some time. So it’s not surprising that large investment banks have been telling their clients to buy UK stocks all year long.
Back in April, for example, Goldman Sachs strategist said: “We think the UK offers one of the best entry points in its history.”
A month later, it was the turn of analysts at HSBC, who calculated that London’s discount to New York was 23% wider than usual.
Now, Goldman Sachs is pounding the table again on UK stocks. Here’s what it said.
Safe haven from the tech sell-off
London doesn’t have any AI tech giants, and the analyst team reckons that might be a good thing right now.
This comes as shares of chipmaker Nvidia have plunged 24% since mid-June. Meanwhile, Google parent Alphabet is down 21% in two months, suggesting that AI fizz is starting to come out of US tech stocks.
The bank said the FTSE 100 offered investors a “good diversification from the concentrated and tech-heavy S&P 500”. It highlighted its dividend and share buyback yield of 6%.
This bullishness extended to the mid-cap FTSE 250, which it reckoned could benefit from a myriad of factors. These range from improved UK economic momentum to a stronger pound and declining interest rates.
How to approach this?
As an investor, there are three main ways I could try and profit from this.
First, I could go down the passive route by investing in a FTSE 350 tracker fund. This would be akin to buying most of the UK market in one fell swoop.
Alternatively, I might buy UK-focused funds that are actively managed. One from the FTSE 250 to consider could be Finsbury Growth & Income Trust. This primarily focuses on blue-chip UK stocks, with large positions in Diageo, Unilever and Experian.
Finally, I could buy individual stocks that I reckon will generate superior long-term returns. This is what I’m doing in my own portfolio.
Still in the bargain basement
A stock that personifies the UK’s deep value to me is British American Tobacco (LSE: BATS).
At just under £30 a pop, the shares aren’t as cheap as when I first started buying them back in March at £23. But this FTSE 100 stock still offers tremendous value, in my eyes.
First off, it’s trading at 7.7 times earnings. That’s cheaper than both Imperial Brands (9.6) and Altria Group (9.2). It also offers a higher dividend yield of 8% compared to Imperial’s 6.7% and Altria’s 7.6%.
Of course, tobacco companies are facing a structural decline in cigarette sales. This is a risk to profits and dividends long term. Increasing regulation is also an issue that investors need to consider.
Yet it’s unlikely smoking is going to disappear around the world overnight. Moreover, British American Tobacco’s non-smoking division, which houses brands like Vuse (e-cigarettes) and Velo (nicotine pouches), is starting to become a bigger piece of the overall pie.
For the full year, the company sees revenue and adjusted earnings per share both growing by low-single-digits. It’s also buying back a tonne of its own shares while they’re cheap.
I’ve also been snapping up the stock for its ultra-high-yield to try and boost my passive income.
