I’ve always believed that the best time to buy UK shares is when they are dirt cheap, rather than expensive. That’s good news, because right now, I’m finding plenty of FTSE 100 stocks trading at low, low valuations.
I’m not sure that will last much longer. If current optimism about Covid vaccines proves correct, we could be out of lockdown in a couple of months. When the nation is set free, it is likely to go on a massive spending spree, turbo-charging the recovery. If I’m right, then UK shares could fly.
They are already showing signs of life, as global investors sit up and take notice of just how cheap UK shares have become. Over the last five years, the S&P 500 has grown at a compound annual growth rate of 18%, while the UK’s FTSE 100 delivered just 7% a year.
The FTSE 100 may fight back
Our domestic stock market has not just underperformed the all-conquering US, but the rest of the world too. Last year, the MSCI World index rose 16.50%, while the MSCI UK fell by 10.43%. Ours is one of the few global stock markets to end 2020 lower than it began, as most countries were elevated by unprecedented fiscal and monetary stimulus. Investors also had to contend with Brexit uncertainty.
That might put some people off investing in UK shares today, but for me it looks like a green light. We have stolen an unexpected march with a vaccination programme, which should give us a head start out of lockdown. The sooner the nation is protected against coronavirus, the faster the economy should grow.
None of this is guaranteed, of course. The future is not ours to see. Mutant Covid could delay the recovery. Many UK shares are cheap for a good reason, as profits and dividends have been hammered by the pandemic.
Also, investors have to choose their sectors carefully. Some hardy investors will be keen to take a big bet on, say, airline, hotel, travel and leisure stocks. These sectors have most to gain when people are set free to spend again. They also have most to lose if international travel bans drag on and on.
UK shares are due a rally
I’m playing relatively safe. I might buy one or two banks, such as Barclays or Lloyds Banking Group, as they should benefit from a wider recovery. As should mining stocks such as BHP Group and Rio Tinto. London-listed stocks with large exposure to the US, such as Ashtead Group and Ferguson, should get a lift from President Biden’s $1.9trn stimulus plan.
I would mix and match them with less cyclical stocks, such as household goods giant Unilever, spirits group Diageo, and pharmaceutical dividend hero GlaxoSmithKline.
These are just some of the top UK shares now trading at temptingly lower valuations. The road to recovery will be bumpy, but that won’t put me off. I’m keen to get motoring as soon as I can.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, GlaxoSmithKline, Lloyds Banking Group, and Unilever. 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.