Last week, during a conversation with a friend who works for a City-based investment firm, the prospect for UK assets came up. He explained to me that almost nobody wants to touch UK stocks right now. I disagreed. Now may be the best time to invest in stocks, when there is panic on the trading floor.
A lesson from recent history
The conversation reminded me of the prevailing investor sentiment towards UK assets in the wake of the Brexit referendum. Back then, shares in British REITs tanked, the sterling declined against other major currencies, and the FTSE 100 fell sharply.
Investors were expecting the UK economy and financial markets to be done. None of this pessimism came to pass, however. Since the day of the referendum, the FTSE 100 has climbed by 15% as of the day of writing.
Long-term investors, I believe, must be willing to brave many market storms in order to build lasting wealth.
Focusing on the long term
Warren Buffett, and other legendary investors, have certain rules of judgement that they abide by when making allocation decisions. One of them is to buy stocks when the market aggressively sells them. This is easier said than done. Emotions and not reason govern human action. However, we must aim to be rational when we invest our savings.
I am not saying that every time a stock or sector gets battered is a good buying opportunity. Sometimes there are genuine weaknesses in the fundamentals of a particular company, sector or economy. This was the case with banks – pretty much worldwide – throughout the global financial crisis. Back then, the market was right in punishing bank stocks.
However, more often than not, the market consensus tends to exaggerate either the upside or the downside of an event or set of events. In light of our current discussion, I think this means that some parts of the UK stock market may be unjustly unloved by investors.
Data shows that the FTSE 100 now trades at a forward price-to-earnings ratio of 10.14, down from 15.38 two years ago. This seems a bit drastic: the UK’s economy, both domestically and internationally, is in a better position than during the Covid-19 pandemic.
If I was to follow the advice of Buffett, it is during times of exaggerated sell-offs, such as this one, that I would look to invest in stocks. Right now, the chance of finding bargains (companies with solid fundamentals but cheap prices) ought to be higher.