FTSE shares started last year brightly, but faded as 2024 drew to a close. The benchmark FTSE 100 index still delivered a total return of around 9% though, with dividends reinvested. That’s roughly double the return on cash.
Some individual stocks did much better, with British Airways owner International Consolidated Airlines Group and Rolls-Royce Holdings pretty much doubling. Others didn’t do as well. That’s always the case.
While overall index performance dominates the headlines, it doesn’t matter so much to those who buy individual stocks. Many companies will see their share prices flying in a falling market, and vice versa.
Can the UK stock market recover?
The FTSE All-Share is broadly flat so far this year, although of course it’s early days.
While the Labour Budget has caused controversy, there’s another factor at play. Investors were expecting interest rates to have fallen sharply by now. They anticipated six UK base rate cuts last year. Instead, they got just two.
We may only get two cuts this year as well. The reason is that inflation is proving sticky, and a combination of additional UK government spending and anticipated US tax cuts once Donald Trump takes power won’t help.
That’s good news for savers, because it boosts the return on cash. It’s good news for bond investors too, as it drives yields higher.
This allows investors to get a decent inflation-beating return from cash and bonds, which gives them less of an incentive to take risks with their capital by investing in shares. This explains why the FTSE has idled.
It’s particularly noticeable with big dividend income stocks. Some offer fantastic rates of income. FTSE 100 fund manager Schroders (LSE: SDR) has a blockbuster trailing yield of 6.83%. But given its volatile share price, many are willing to forsake that for the relative safety cash and bonds offer.
The Schroders share price has slumped 26% over the last 12 months and 47% over three years. The group has suffered customer outflows, as investment performance has disappointed. Exposure to the Chinese stock market hasn’t helped.
Today the shares look incredibly cheap, trading at around 12.8 times earnings. By comparison, the FTSE 100 average is about 15 times.
Schroders has lost some big investor mandates recently, but is the type of stock that should do well when investment sentiment picks up. When will that be? I have no idea. Nobody can say for certain but I do think this is a stock worth considering.
I’ll always choose shares over bonds
All I know is this. The UK stock market is cheap, at roughly half US levels. Savvy investors know that buying at lower valuations increases the margin of safety.
If history is any guide (which it may not be), those who invest wisely in turbulent times often reap the biggest rewards. By picking up quality companies when they’re undervalued, investors can position themselves for substantial long-term gains.
Rising interest rates, geopolitical tensions, concerns over the UK outlook and US trade tariff threats have all knocked share values lately.
Yet this offers investors an opportunity to get rich, with a long-term view. The key is to focus on quality companies with strong balance sheets, competitive advantages and proven management teams. I’m not selling shares, but buying them.
