A ‘perfect storm’ describes a moment where several unusual events coincide to produce an atypical result. Lately, I have been wondering if 10 or 20 years from now, we might look back at today and realise it was actually a perfect storm for UK shares.
In other words, could the sorts of valuations on offer today come to be seen as raging bargains with the benefit of hindsight?
Mixed signals
Let us start by considering some of the factors currently conspiring to shape the price of UK shares. On one hand, they do not look cheap. The FTSE 100 index of leading shares has been within 5% of its all-time high this week.
At the same time, some individual FTSE 100 shares look very cheap. Vodafone (LSE: VOD), for example, has a double-digit percentage dividend yield and touched a three-decade low last week.
Events combining
I think there are a few factors that have helped push some UK shares down to what can sometimes look like bargain basement prices. One is the retreat of buyers from the British stock market. Both domestic pension funds and international investors are showing less enthusiasm than in the past for buying UK shares.
Another factor is an uncertain economic environment. That is not specific to the UK but it does impact us.
I think a third factor contributing to some current valuations is a bias against certain types of company. Whereas the US market has lots of large tech businesses listed, its equivalent on this side of the pond is distinctly more old economy.
Why I’d buy
My response to this situation is to try and buy into UK shares this year that I think look significantly undervalued and that have long-term commercial prospects I like.
Vodafone is an example. It has millions of customers and is a market leader in multiple countries across Europe and Africa. Not only do I expect long-term demand for telecoms and data services to grow, mobile money expansion in Africa could be another growth driver.
It has around €36bn of net debt and paying that could eat into profits. Revenue is falling – it shrank 4% in the first half. Asset sales could see it decline further.
Still, with its 11.9% dividend yield and market capitalisation of less than £18bn, I think this UK share selling for pennies is a potential long-term bargain.
My approach
By buying into a range of carefully-chosen blue-chip companies I think I could hopefully build wealth over the long term.
I would not select UK shares to buy on the basis of low price alone. Rather, I am hunting for value. So I pay close attention to a company’s business model and prospects when considering whether to buy its shares.
