I read a Financial Times article a few months ago that spoke about what a bargain UK shares had become. So cheap, in fact, that the newspaper called the state of affairs “embarrassing”.
Cheap shares, of course, are good for investors. If I can invest at a low point, I can get the biggest return. The biggest lows for the FTSE 100 in the last 20 years were after the 2008 crash and the Covid crash, both of which would have been highly profitable times to start investing.
The important question then: is this really a rare opportunity to buy into cheap UK shares? Let’s start with the evidence.
A Liberum article recently stated that UK shares “trade at a huge discount to US and European peers”. It estimates a 30% discount against US shares and a 25% discount against European ones.
Only 11%
Those are pretty telling figures. What might be even more telling is the same piece explains that the FTSE 100 has gone up only 11% in 23 years. That is ignoring dividends, but is still an atrocious return.
The key detail in all this, though, is that revenues and profits are still rising.
The P/E ratio (price-to-earnings) can help me here. It allows me to compare share prices while taking into account the profits that companies make. The CAPE (cyclically adjusted P/E) — like a 10-year P/E ratio average — can help, too.
| FTSE 100 | S&P 500 | |
| P/E ratio | 10.8 | 26.3 |
| CAPE | 15.9 | 30.8 |
The FTSE 100 looks cheap both compared to US stocks and by historical standards, from this data at least. One way of looking at it: for every pound (or dollar) of profit, the FTSE 100 shares are cheaper to buy.
Individual companies show the same trend, that is, increased profits without the share price going up to match. Here are some particular examples.
| 2016-2023 | Earnings | Share price |
| British American Tobacco | +43% | -28% |
| Lloyds Bank | +126% | -26% |
| BT | +58% | -39% |
| Tesco | +21% | -13% |
| Taylor Wimpey | +9% | -43% |
The data seems pretty clear: UK stocks look underpriced. So much so, I’d say, that the term ‘once-in-a-generation’ seems justified.
If UK shares are so cheap then, am I throwing all my money into them? Well, the uncertainty since Brexit and a chronic lack of innovation are both big problems with companies in this country. These issues, and perhaps others too, do explain the deflated prices to some degree.
So, it’s not like UK stocks are obvious buys. However, as a contrarian investing strategy, buying into British companies could offer some real wealth–building potential. It’s often said that doing the opposite of the market is where you get the best returns.
In 10 years
The famous (apocryphal?) story comes to mind of the investor who knew it was time to sell when even his shoeshine boy was giving him stock tips. I can take a similar attitude by buying up UK shares right now as others are cautious. In 10 years, I might look back on this period as a great ‘low’ to buy into.
It might sound obvious, but the right research here is key. I don’t expect every UK stock to be excellent value, but I do believe there are lots of undervalued gems out there at the moment.
