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The UK stock market looks cheap…and it could get even cheaper!

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With 31 October fast approaching, it’s understandable if investors are getting even more jittery than normal and refraining from deploying any of their capital until we have more certainty surrounding the form of our departure from the EU (if we depart at all). 

Notwithstanding this, I think there’s an argument that those investing in the UK now could eventually be rewarded. Let me explain. 

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UK plc is already cheap

When it comes to valuations of entire markets, I look to the cyclically adjusted price-to-earnings ratio or CAPE for short. The great thing about this metric (popularised by Yale University professor Robert Schiller) is that it gives average valuations over a 10-year period, thus taking into account market fluctuations over time.

These days, the UK has a CAPE of around 15. That might not mean an awful lot on its own but things start to get interesting when you compare this value to those of other countries, specifically developed ones.

The UK is, for example, cheaper than Germany (17) despite real concerns about a recession in the latter. France is far more expensive than both with a CAPE of 21. Unsurprisingly, however, the US stock market is the dearest of all four with a CAPE of 29. Ominously, this sort of valuation has usually preceded a big fall in the market, such as the Great Depression and the dotcom bust.

From a psychological perspective, however, these valuations make some sense. The US boasts some of the biggest companies in the world (Amazon, Apple, Facebook, Google), all of which have grown massively over this abnormally long bull market. What’s popular has a habit of becoming even more so, hence the frothy price tag.

The fact that the UK is relatively cheap is also no surprise. A no-deal scenario could send our main indices even further down in value as investors fret over the possibility of more delay (since Boris Johnson is now prevented by law from leaving without a deal) and a general election, not to mention the growing prospect of a recession.

Is this a nailed-on certainty? Of course not! Upside-down market logic dictates that confirmation of no deal could actually encourage a rally for the simple reason that investors now have their fears confirmed, which is a lot more than they’ve had for three-and-a-bit years. A resolution to the US-China trade spat could also reinvigorate things.

At the Fool UK, we’re big fans of the old adage that successful investing is all about “time in the market, not timing the market“. As stated above, the key point to realise is that the UK market is already pretty cheap and arguably worthy of investment.

So, what’s the easiest way to invest?

Getting exposure to the UK market through exchange-traded funds offered by passive investing giants like Vanguard and iShares is as simple as it gets. For very low fees, investors can track major indices like the FTSE 100 with the added attraction that their money will be spread among different sectors. 

But low costs and instant diversification aren’t the only positives. Just like individual companies, funds like these also pay out dividends to holders. While it’s undeniably more fun to spend these cash returns, any Fool committed to building their wealth over the long term should consider re-investment their default option. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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