The recent stock market rally has lifted the prices of a wide range of cheap UK shares. Investors have become increasingly upbeat about the economic outlook, as the UK’s vaccination programme rolls out.
Despite this, the valuations of many FTSE 100 stocks appear to be very attractive. Such was their fall in the 2020 stock market crash, they still trade significantly down on their prices from the start of the year.
As such, they may offer further capital growth potential. Buying them in a tax-efficient account such as an ISA could prove to be a profitable long-term move.
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Improving economic prospects lift cheap UK shares
Lloyds (LSE: LLOY) is an example of a FTSE 100 stock that has outperformed many cheap UK shares in recent weeks. Its shares are up by 23% over the past month, as investors have begun to look ahead to an improving economic outlook.
The bank’s shares are still down 40% since the start of the year. This suggests that they continue to offer a wide margin of safety. This may factor-in risks to the company’s performance, such as a prolonged period of low interest rates and the likelihood of weak economic prospects in the short run.
However, I hold Lloyds and think its long-term recovery prospects seem to be sound. Lloyds recently reported a return to profitability in the third quarter, with a reduction in impairments and a rise in mortgage lending. It has also strengthened its financial position, which could allow it to overcome short-term uncertainties to post a successful long-term recovery.
Value opportunities within the FTSE 100
Other cheap UK shares to make gains in the past month include Glencore and Whitbread. They have returned around 30% and 20% respectively in that period. In doing so, they have outperformed many of their index peers.
Glencore is on my watchlist. It now trades at a similar price to where it began in 2020. However, its earnings growth forecasts suggest that it has further capital growth ahead as a global economic recovery takes hold. It is due to post a 70% rise in earnings next year after what has been a challenging current financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.3. Given its planned shift towards low-carbon assets and the growth opportunities they present, this could undervalue the business in an improving global economic outlook.
Meanwhile Whitbread, which I already hold, could be relatively attractive compared to other cheap UK shares. Its financial position has strengthened this year, while it has been able to reduce unnecessary expenditure. Within a sector that has been decimated by events this year, the company’s budget focus and solid balance sheet could provide it with a stronger competitive position. This may lead to growing profitability as the economy recovers. Whitbread still trades 24% down in 2020, which suggests it offers a wide margin of safety.
