So far, this has been a good year for the UK stock market.
The flagship FTSE 100 index of leading shares recently hit an all-time closing high. It has moved up 8% so far this year. The FTSE 250 index of small and mid-cap companies has done less well, but is still up 5% compared to where it began the year.
Could things keep getting better? Nobody knows what will happen next in the stock market. However, I see some reasons to be optimistic.
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Valuations still look cheap
Even though the FTSE 100 has been roaring ahead, a lot of the shares in it continue to look attractively valued to me.
Some well-known blue-chip companies trade on price-to-earnings (P/E) ratios in the mid-single digits. Lloyds is on seven, for example, as is Lambert & Butler maker Imperial Brands.
P/E ratios are not the only thing I look at when assessing valuation. A company’s future prospects and its balance sheet matter too. But, overall, I think a number of FTSE 100 valuations continue to look cheap. That could provide space for the stock market to move up further.
Some risks ahead
That said, stock market performance relies to some extent on how the wider economy does over time.
Lloyds shares look cheap, but I think one explanation for that is that investors are concerned by the ongoing risk of a weaker economy pushing up loan defaults and hurting profits in the banking sector.
For now, the growth outlook remains weak. I see an ongoing risk that a recession could lead consumers to spend less, hurting profits at many companies.
Why I’d buy
But as a long-term investor my focus is on trying to buy into enterprises I think look set to do well over the long run and have an attractive share price now.
I think there are plenty of such opportunities in the current stock market.
Take one of the firms on my shopping list for example. If I had spare cash to invest, I would be happy to buy into FTSE 100 financial services provider Phoenix (LSE: PHNX).
Its 10.4% yield and track record of dividend growth appeal to me. Past performance is not necessarily an indicator of what will happen in future, but Phoenix has set out a progressive dividend policy that hopefully will see the shareholder payout keep growing regularly.
With a large existing customer base, deep operational experience, and well-known brands, I think Phoenix could continue to do well in the future.
But the seemingly bargain price could suggest there are risks here. All companies bear risks and Phoenix is no exception. One is credit risk in the firm’s £38bn shareholder credit portfolio and property risk in its equity release mortgages. If Phoenix misprices those risks, it could be a costly mistake.
On balance, though, I like this high-yield share, which is why it’s on my ISA shopping list.
Rather than spending any time worrying about what might happen in the stock market in future, I am looking for bargains I can buy now!
