The FTSE 100 closed at an all-time high of 8,024 points on 22 April. And on the day after, as I write, it briefly peaked above 8,076 points.
Is the gloom of the past few years finally lifting, and are the days of cheap UK shares numbered?
Sentiment is clearly improving. And weak sentiment is what has kept Footsie share prices so low over the past five years.
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Interest rates are playing a big part. Why risk money on the UK stock market in tough times when we can get a guaranteed 5% from a Cash ISA?
A zero-risk cash investment has its attractions. But rates can’t stay that high once the Bank of England starts its cuts.
Confidence boost
Head of investment analysis and research at Hargreaves Lansdown (LSE: HL.), Emma Wall, tells us: “Investor confidence has ticked up once again April. Confidence in all global sectors has risen, but particularly in the domestic stock market — where clients have seen an eight-point surge of optimism.“
I never knew there was a way to quantify optimism. But anything that suggests people are 8% happier is good with me.
She also points out: “The UK market is currently on a considerable discount to developed market peers of around 40%, but features high quality companies with global revenues, good cash reserves, and in many cases well-covered, attractive dividends.”
UK shares still cheap
That’s key for me. The FTSE 100 is more lowly valued than, for example, the S&P 500. It might make sense if it only held UK-centric stocks, while the S&P was home to US-centric ones.
But that’s just not the case.
Most of the companies at home on London’s top index are every bit as global as most of those listed in the US. Only they’re cheaper. And they pay better dividends.
Shell, for example, is on a forecast price-to-earnings (P/E) ratio of under nine. For Exxon Mobil, the figure is above 13. Does Shell really deserve to be valued a third lower than Exxon?
What to buy?
I’m looking at Hargreaves Lansdown stock itself right now. I’d rate it as be a barometer of market sentiment, but it does seem to overshoot.
And we’re looking at a 67% fall after the past five years of pessimism.
Before the Covid crash, Hargreaves Lansdown was trading on a P/E of over 35. Today, forecasts put it at only 12.5 for this year. And there’s a predicted dividend yield of 5.7%.
Both would be heading in the right directions if forecasts prove accurate — the P/E down, and the yield up.
Cyclical value
We’re clearly looking at a cyclical business here, based on how the stock market goes. And I could see more volatility in the next couple of years.
But over the decades, the FTSE has had far more good years than bad years.
So, I do think investment services firms like Hargreaves Lansdown and AJ Bell could be good ones for those of us who see long-term stock market optimism.
And I reckon we’re nowhere near the end of cheap UK shares — and we very possibly never will be.
