UK stocks could be set for greener pastures ahead after a murky 18 months or so. Before any potential bull market occurs, I reckon there are still some bargains to be had.
Let me explain what’s happening and break down one pick I’ve got my eye on.
Interest rate cuts ahead?
The Premier League of the FTSE, the FTSE 100, is up 6% in 2024 to date. At the end of last year, it closed at 7,733p, and currently trades for 8,215p.
Continuing with the football analogy, (my husband would be so proud) the Championship, in this case the FTSE 250, is also up by 4% this year to date. The index has risen from 19,511p at the end of last year, to current levels of 20,463p.
A cocktail of high interest rates, inflation levels, energy prices, and geopolitical volatility meant that the markets have been subdued for some time.
From an economic view, inflation has come down, and there are murmurs of potential interest rate cuts in the summer. This is probably why the markets are reacting positively. All we need now is a proper summer with some sun and it could be a good few months ahead!
However, there’s no guarantee that rates will be slashed. Plus, we’re still not out of the woods from an inflation perspective. Then there’s the small matter of a general election hurtling towards us in less than a month that could bring uncertainty too.
Properties for supermarkets
One stock I reckon is cheap as chips is Supermarket Income REIT (LSE: SUPR).
Set up as a real estate investment trust, (REIT) the business invests in and makes money from properties. In exchange for tax breaks and other perks, the firm must return 90% of profits to shareholders.
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When I think of the defensive nature of supermarkets, as well as changing shopping habits and a growing population, supermarket businesses need vast estates and infrastructure to operate. This is where Supermarket Income could benefit and thrive.
Supermarket Income shares haven’t had a great time due to economic pressures pushing down net asset values (NAVs). Plus, the potential for rent defaults has been higher too. Add to this higher borrowing costs for growth, and there are some tangible risks, at least in the medium term. Earnings and returns could be impacted.
Conversely, from a returns perspective, a dividend yield of over 8% is enticing. However, I’m conscious that dividends are never guaranteed.
As for Supermarket’s valuation, theoretically, the share price and NAV should align. However, the NAV is currently 15% lower than the share price. In turn, the shares are trading at a 15% discount.
I reckon once economic volatility dissipates, the shares should climb and earnings, growth, and returns should follow suit.
In my view, buying some shares now could be a shrewd move. I’ll be looking to snap some up the next time I have some investable cash!
