After a tough couple of years, the UK stock market finally looks to be shifting into a more sustainable growth phase. The FTSE 100 recently hit record highs, and many global markets seem to be following suit. While short-term volatility persists, I believe there are three clear signs that a new bull market phase may be underway.
Interest rate cuts are coming
Markets are most likely pricing in rate cuts from the Bank of England and the European Central Bank, with the US Federal Reserve not far behind. This matters because lower interest rates reduce the cost of borrowing, boost consumer spending and raise the present value of future cash flows – all of which tend to lift share prices.
Rate-sensitive sectors like housebuilders, financials and real estate investment trusts (REITs) could benefit most in the early stages of a rally. I’m particularly watching Persimmon and Legal & General, both of which offer dividend yields well above 6% and have seen share price momentum picking up since March.
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Corporate earnings are improving
Despite all the talk of stagflation, many UK-listed companies have continued to grow profits. Recent results from Rolls-Royce and BAE Systems show strong order books, rising margins and a growing global footprint. These earnings upgrades probably helped drive the recent stock market rally and I think they’re being underappreciated.
More broadly, the price-to-earnings (P/E) ratio for the FTSE 100 remains below its 10-year average, despite the positive earnings outlook. This suggests the rally could have further to run.
Investor sentiment’s turning
After years of underperformance, UK shares are finally seeing renewed interest from domestic and international investors. Our local stock market still trades at a significant discount to global peers, yet many British companies offer superior dividend yields and more conservative balance sheets.
That discount, combined with a shift in sentiment, could lead to more inflows over the coming year – especially if political uncertainty eases after the general election. I’ve noticed several UK-focused investment trusts such as Mercantile and Finsbury Growth & Income starting to close the gap between share price and net asset value.
How I’m investing today
Rather than chasing tech stocks that have already surged, I’m focusing on quality UK companies that still look undervalued. Think strong free cash flow, sustainable dividends and management with a long-term track record.
Consider LondonMetric Property (LSE: LMP), a logistics and urban warehousing REIT that benefits from stable rental income and prudent portfolio management. With a P/E ratio of just 11.77 and a P/E growth (PEG) ratio of 0.19, the shares appear undervalued. It offers an attractive 6% yield, supported by a payout ratio of 70% and 10 consecutive years of growth.
However, it’s exposed to interest rate fluctuations and at risk from falling commercial property values or weaker tenant demand. Both could affect rental income and asset valuations.
Nonetheless, for investors seeking a stable and reliable income stock, LondonMetric’s one to consider. Its combination of low valuation, consistent growth and a generous yield stands out — albeit taking into account the sector’s cyclical nature.
