When cheap markets meet favourable conditions, sentiment flips very quickly

London’s stock market is cheap — some sectors, even cheaper. Given a change in sentiment, the uprating could be substantial.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The latest GDP figures, for the fourth quarter of 2023, told many of us what we already knew: the UK economy is fairly stagnant. And with a fourth-quarter drop of 0.3% combined with a 0.1% third-quarter fall, the UK is now technically in a recession.

Granted, not by very much. And indeed, over 2023 as a whole — and not the final six months — the economy actually grew by 0.1%.

But annual growth of 0.1% is equally nothing to get excited about, just as a fall of 0.4% or so is hardly a harbinger of doom. Either way, though, the point is that prime minister Rishi Sunak’s promise of economic growth isn’t being met. We’re just flatlining, essentially.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

What we need is a feelgood factor

A few weeks back, I really wasn’t sure that now was the time to place a bet on the economy, and on London’s stock market. America’s economy, and America’s stock market, looked more attractive.

My argument then was any economic stimulus would happen the other side of the general election that must take place in the next twelve months. Until then, the economy was just treading water.

Now, I’m not so sure. Don’t get me wrong: America is still attractive. But one way or another, it’s likely that a fresh government would provide some certainty and confidence that the drift of the last couple of years might come to an end.

Put another way, commentators are talking up the similarities between now and 1997, when Labour under Tony Blair won the general election. And yes, the two elections are indeed comparable

But think back to what happened after the election — a sharp increase in feelgood factor, as people saw a government emboldened to act. Think of Gordon Brown’s decision to make the Bank of England independent, for instance, freeing it from political interference when it came to setting interest rates.

Boom times over the Atlantic

Investors have hardly been enthusiastic about UK equities over the past several months. The Investment Association has been reporting net outflows from UK equity funds, with the withdrawn cash being reinvested in fixed-income funds and short-term money market funds.

The reason isn’t difficult to figure out. Look at the FTSE 100’s five-year performance: over five years, it’s up just 6.8%. To save you doing the maths, that’s an annual compound growth rate of 1.7% — hardly stellar stuff.

America? Over five years, the broadly-based S&P 500 (a far more representative index than the Dow Jones Industrial Average) had risen just over 80%. That’s an annual compound growth rate of 15.9%.

And again, to save you doing the maths, that means that the S&P 500 has outgrown the Footsie by over nine times.

No wonder, once interest rates began rising, fund managers started switching out of equities into fixed income funds: they need quarter-on-quarter growth rates to report to their investors.

Where the bargains are

But ironically, that’s just what they could start to see in the coming months. As I said, this economic drift will not persist forever. And frankly, it’s difficult to imagine that a change of government might make things actually worse.

Although, come to think of it, that’s more-or-less exactly what happened when Boris Johnson was replaced by Liz Truss: markets tanked, spectacularly.

But we’ve got more than just hope to rely on. The facts — and one fact in particular — go in investors’ favour as well.

The UK stock market is cheap. The FTSE All-Share index is on a price-to-earnings ratio of 11.9. The FTSE 100, a price-to-earnings ratio of 10.8. The FTSE All-Share Financial sector — containing 256 companies — is on a price-to-earnings ratio of 9.1. The FTSE All-Share Basic Materials sector (21 companies), 6.7. The energy sector (15 companies), 6.5.

And so on, and so on. America’s S&P 500? 22.8. The Dow Jones Industrial Average? 25.7.

1997, redux

In short, I think we may have seen this movie before.

The next few months could well be torrid. But it’s not going to take a massive shift in sentiment for the market to turn: when cheap markets meet favourable conditions, sentiment flips very quickly. And elections — and changes of government — have a handy knack for delivering that change in sentiment.

And with the price-to-earnings ratios mentioned above, I know where I’ll be looking.

Take it from me.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

UK money in a Jar on a background
Investing Articles

Here’s how a stock market beginner could start investing with £2 a day

Our writer illustrates how, even with just a couple of pounds a day to spare, a new investor could start…

Read more »

Investing Articles

£10k invested in 2025’s best-performing FTSE 100 stock one month ago is now worth…

Mobiles specialist Airtel Africa was the top FTSE 100 stock in January, after investors celebrated confidence-boosting results. So how long…

Read more »

photo of Union Jack flags bunting in local street party
Investing Articles

How much would an investor need in UK shares to earn an £833 monthly passive income?

For any investors hoping to make a passive income, UK shares might be one path towards the goal. Let’s take…

Read more »

Investing Articles

How much could a £20k Stocks and Shares ISA earn in the next decade?

If someone invested a £20k Stocks and Shares ISA now, what might they hope it to be worth in a…

Read more »

US Stock

Investing £750 in the S&P 500 a year ago would be worth this much now

Jon Smith explains why an investment in the S&P 500 last year would have beaten the FTSE 100, but cites…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here, in 5 steps, is how Warren Buffett turned £100 into £3,787,464!

Our writer learns a handful of lessons from the masterful investing career of Warren Buffett and his phenomenal long-term performance.

Read more »

Close-up of British bank notes
Investing Articles

£800 invested this February could be earning a second income by the summer!

Buying a portfolio of dividend shares is a proven tactic for building a second income. Here's how it could be…

Read more »

artificial intelligence investing algorithms
Growth Shares

2 FTSE stocks that could do well with the DeepSeek AI breakthrough

Jon Smith talks through the implications of the latest AI news and flags up some FTSE shares that could benefit…

Read more »