UK interest rates are going nowhere fast. That makes an investment in cheap FTSE 100 shares much more appealing than holding onto cash savings.
It’s certainly harder than at any other time in history for people to enrich themselves through careful saving.
UK interest rates are at record lows in 2020. 0.1% is a miserly return. It’s as close to zero as it makes no difference. And the rate of UK inflation is now at 0.9%, up from 0.7% in September. So that means any cash stuck in my bank account is actually losing value over time!
This is a shoddy state of affairs for UK savers. And it means that cheap FTSE 100 shares could be a much more attractive way to make money in 2020 and 2021
Why cheap FTSE 100 shares?
The reason I tend to look for value in cheap FTSE 100 shares is because of liquidity.
What I mean by that is: if I want to sell my shares, there is more chance there will be a buyer on the other end. The smaller and less popular the company, the less likely it is there will be a buyer when I come to sell.
Of course, I’d prefer to beat UK interest rates and hold onto my shares forever. With Hargreaves Lansdown, I have to pay a £11.95 fee every time I buy or sell shares. These charges can quickly stack up.
But the main reason that I seek out undervalued and cheap FTSE 100 shares is so I can reinvest dividend income and take advantage of compound growth.
Which shares I buy
Because UK interest rates are so miserly, I don’t have to make a massive return on my investment. In fact, if I make 1% a year I’ll be doing better than holding cash! But my approach is to find cheap FTSE 100 shares. In other words, these are companies trading at low price-to-earnings ratios that have solid dividends.
This is the value investing style favoured by some of the world’s most successful investors, like Warren Buffett, Peter Lynch, Sir John Templeton, and Philip Fisher.
The UK interest rate was near an historic low of 0.5% at the turn of 2020. Then the Bank of England slashed it to an all-time floor of 0.1% in March.
In Japan and the eurozone, interest rates are even worse than in the UK — at negative numbers! This creates particularly miserable income yields on bonds (government debt). So it’s no surprise that cheap FTSE 100 shares are so popular these days. Investors have few other places to turn to make a return on their capital.
The pick of the bunch
The pandemic, economic crash, and lockdowns have made the list of cheap FTSE 100 shares much longer than ever. According to Hargeaves Lansdown, the top FTSE 100 shares traded this week include Lloyds Bank, Rolls Royce, and British Airways owner International Consolidated Airlines.
Each could be considered cheap FTSE 100 shares in their own right. In fact the last of these, IAG, is trading at just over 1 times earnings!
With more optimism in the air now that Covid-19 vaccines are coming, the travel stock could be a decent play for 2021, in my opinion.
TomRodgers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.