I think the Lloyds (LSE: LLOY) share price and many other UK stocks are tremendously undervalued at current levels. Investors have been selling these companies due to the uncertain outlook for the UK economy.
It’s clear the economy is heading into an extended period of uncertainty. The pandemic, coupled with Brexit, are two headwinds that could cause further instability in the year ahead.
However, when I look past these macroeconomic issues and focus on the underlying fundamental performance of UK shares, I’m incredibly excited by what I see.
That’s why I’m backing these businesses, as well as the Lloyds share price for 2021.
UK shares on offer
The main reason why I’m optimistic about the outlook for UK shares in 2021 is Brexit. No matter what happens over the next few weeks, any deal or no deal will bring some certainty. This will allow companies and investors to plan.
What’s more, after the first couple of months, we should have a much better idea of how the divorce will impact companies, and how badly their earnings/sales will be affected.
Once again, this will bring clarity to an uncertain situation. It should also give investors more to go on when evaluating investments like the Lloyds share price.
Other UK shares should prosper as the coronavirus pandemic recedes. A vaccination programme is already in progress across the UK and, by the first half of next year, global vaccination efforts should be well underway.
This could be hugely positive for travel-related companies like Carnival and IAG. Also, domestic UK banks such as Lloyds and its peers, Barclays and Virgin Money, for example, may be able to move on from the crisis and re-focus on growth. Combined with the ending of the Brexit debacle, these lenders could benefit from a double tailwind in 2021.
Lloyds share price
I think Lloyds should see a much better performance than many of its peers in this best-case scenario.
There are a couple of reasons why I believe the lender could be a better investment. First of all, it’s one of the most profitable banks in Europe with a return on equity in the double digits. Second, the lender is well capitalised. And third, for the past few years, management has been concentrating on reducing costs to improve profit margins.
Combined, these three factors should help the group’s profitability in the years ahead. However, despite its potential, the Lloyds share price is trading at a significant discount to book value. This isn’t appropriate. Companies deserve to trade at a discount to book value if they’re losing money for investors.
Lloyds is likely to lose money overall this year, but profits could surge over the next few years. On that basis, I believe the Lloyds share price is hugely undervalued.
Like many other UK shares, it could benefit significantly from an improvement in trading performance over the next few years. As such, I reckon there’s a good chance the investment could yield high total returns for shareholders in the years ahead.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Barclays and 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.