Over the past month, I’ve read a slew of articles all claiming the same thing. Major newswires lined up boatloads of pundits to argue that UK shares had become ‘uninvestable’. To me, this belief is so wrong-headed that it’s completely laughable. Indeed, I’m so convinced that these experts are wrong, I’m putting my money where my mouth is by betting big on cheap UK stocks.
Who says UK shares are rubbish?
Early this month, I spotted a Bloomberg article warning that investors in UK shares and bonds had lost at least £300bn in Liz Truss’s first month as prime minister (from 5 September). Shortly before she resigned as PM, I came up with this little ditty: “Remember, remember the fifth of September. Because markets never forget.”
For the record, global financial markets have taken a big whack since mid-August. But UK shares fared worse than most for many reasons. First, our government was in perma-crisis.
Second, UK consumers are shell-shocked by soaring inflation, skyrocketing energy and fuel bills, rising interest rates and collapsing confidence. Third, tumbling UK government bond prices triggered a liquidity crisis that left pension funds reeling. Fourth, the pound had fallen steeply against other major currencies, crashing to a lifetime low against the US dollar.
Faced with such a toxic combination of events, global investors ditched UK shares, sending prices crashing. But to argue that British stocks were uninvestable after two months of turmoil was taking things too far, in my opinion. To me, this smelled like panic and, potentially, capitulation — which history shows is a great time to buy quality assets on the cheap.
The FTSE 100 looks dirt-cheap to me
Famed investor Baron Rothschild once remarked: “Buy when there’s blood in the streets, even if the blood is your own.” In other words, one of the best times to hoover up assets is when investors are in despair.
Also, it’s important to note that the blue-chip FTSE 100 index is not a proxy for the UK economy. The London Stock Exchange is home to some great global businesses with massive foreign earnings (especially in US dollars). Indeed, roughly 70% of the Footsie’s earnings come from abroad — and the weaker pound makes this income worth more to British shareholders.
And some yet financial commentators refer to the UK as an emerging or even ‘submerging’ market. What rot, nonsense and piffle. I regard UK shares as offering deep value to a patient investor such as me with a long-term view (especially if international mergers and acquisitions activity keeps up).
Right now, the FTSE 100 trades on a price-to-earnings ratio of 13.7 and a corresponding earnings yield of 7.3%. In addition, the Footsie offers a dividend yield of 4.2% a year, with this cash yield covered over 1.7 times by earnings. To me, these numbers look crazily cheap, which is why we’ve moved a big chunk of our family portfolio into UK shares. And we will buy more shares until they no longer appear cheap, unloved and unwanted by nervous investors!