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Stock markets are in the summer doldrums but I think this offers a brilliant opportunity to buy cut-price LSE shares for my Stocks and Shares ISA. I can see loads of top UK companies at rock-bottom valuations that should surge when markets finally rally.
This year has been disappointing for UK investors so far. The FTSE 100 is up a meagre 0.56% year-to-date, compared to 16.83% on the S&P 500. I hoped for more but there is one positive. UK shares now look cheap. They’re trading at just 12.7 times estimated annual earnings, according to Refinitiv, compared to a pricier 18 times in the US. So can the FTSE close the valuation gap?
The rally will come one day
In the short term, much depends on what happens to inflation. Last month, when June’s Consumer Prices Index came in lower than expected at 7.9%, the FTSE 100 climbed 1.8% on the day. The FTSE 250 jumped 4%.
Inflation is expected to fall sharply in July as last summer’s energy price spike falls out of the annual figure. That would give the Bank of England scope to slow interest rate hikes or maybe even abandon them altogether. As well as easing the pressure on consumers and businesses, this would reduce bond yields and savings rates, boosting the appeal of shares. We’ll know more when the next CPI figure is published on Monday.
It’ll take more than a month’s positive inflation figure to revive the UK economy. However, I feel much of the gloom has been overdone. We aren’t the only advanced economy that is struggling to grow, but ever since Brexit, overseas investors have shied away.
I see plenty of companies that are increasing profits at speed, while their share prices go into reverse. Legal & General Group is a good example. Last year, its operating profit jumped 12% to £2.52bn. Yet its share price is down 10.59% over six months and 15.22% over one year.
Great value out there
When Lloyds Banking Group announced a 23% increase in half-year profit to £3.8bn last month, protesters raged at sky-high banking profits and called for a windfall tax. Investors didn’t share their excitement. They’d hoped for £4bn. Lloyds shares have fallen 20% over six months and 4% over one year.
As a result both L&G and Lloyds look dirt-cheap, trading at 5.97 and 5.86 times earnings respectively. They offer bumper yields of 8.31% and 5.57%.
I could pick out loads more FTSE 100 shares that are being punished by the general ill will towards the UK economy. At some point, sentiment will shift and global investors will wake up to the value our market offers today.
I won’t make a million from one year’s Stocks and Shares ISA contribution. But if I max out my £20k allowance year after year and my portfolio matches the FTSE 100’s average total annual return of 6.89%, I’d have £1m in just over 20 years. If my portfolio of stock picks outperforms and grows by 9% a year, I’d get there three years sooner.
The first two decades of the 21st-century have been tough for the FTSE 100 but there’s a real buying opportunity today and I’m taking full advantage.