The global stock market rally has caught many investors by surprise. However, despite the positive performance of international stocks over the past few months, UK shares continue to look cheap.
Indeed, on one estimate, UK shares are trading at the most significant discount to international peers in 40 years.
As such, I’d make the most of this opportunity and buy these dirt-cheap investments to build wealth in the long run.
Stock market rally
The stock market has rallied significantly over the past few weeks. It’s easy to see why investor sentiment has improved so much since the summer. The world seems to be winning the slow fight against coronavirus, and the economic fallout hasn’t been as bad as expected.
Most economies rebounded reasonably quickly from the lockdowns imposed to try and control the spread of the virus earlier this year. That implies there could be a strong rebound after the second set of lockdowns as well.
Against this backdrop, investor sentiment has improved during the past few weeks. Unfortunately, sentiment towards UK shares has remained depressed in the stock market rally.
It seems to me the market is worried about Brexit. However, I reckon these concerns are overdone. We only need to look at the number of takeovers that have been thrust against UK companies this year. Some of these deals, such as Cisco‘s $730m deal for AIM-listed IMImobile, have been launched at substantial premiums.
For example, Cisco offered a premium of 48% to IMI’s market price. I think this shows just how undervalued the UK market is. If it had bought the stock in the market, Cisco could have saved several hundred million dollars. Clearly, both parties thought the firm was worth substantially more.
This isn’t the only example. The five weeks to 25 November saw a total of 14 takeover deals with an average premium of 46%! To put it another way, the market may be worried about the outlook for UK shares, but buyers have clearly not been put off by the UK’s economic outlook.
Buying cheap UK shares
This is the main reason why I’d buy cheap UK shares today before the stock market rally takes off. These companies are undervalued, and it seems as if buyers are quickly waking up to that fact. Based on the recent flurry of deals, I wouldn’t rule out future acquisitions.
What’s more, these recent deals suggest UK equities could rise substantially from current levels when the covering of uncertainty surrounding the UK economy starts to lift.
The best way to play this theme, in my opinion, could be to buy a basket of cheap UK shares, or an index tracker such as the FTSE All-Share. The index current offers a dividend yield of around 4% so investors will be paid to wait for its performance to improve.
The same can be said for many other individual UK stocks. Holding these investments is one of the best ways to play the stock market rally, in my view.