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Value investors will tend to gravitate towards FTSE stocks given the relative underperformance of the subject FTSE 100 index and relatively cheap prices. After all, investors want to buy companies that look cheap, that offer the opportunity to earn big money or big dividend payments.
Down but not out
While UK stock and index prices may have risen since the Brexit vote, the reality is that British stocks are now cheap based on their value relative to reported earnings. There are many ways to extract this, but, simply put, global money (institutions and people’s money) preferred other markets (mainly the US) and other asset classes (such as bonds and money) rather than UK listed stocks.
However, many investors find opportunity in this kind of disappointment. Dividend yields have risen sharply to just over 4% today, up from 3.5% a decade ago, indicating plenty of income potential. Likewise, stocks are cheaper in the near term than they have been in their US counterparts. Logic suggests that this will eventually correct itself.
Are you happy? Wait a bit
Although many analysts and investors recognize that FTSE shares are considered undervalued relative to their potential, the ‘cheap’ tag can be misleading. Investors often make investment decisions based on a stock’s future performance. However, the UK economic forecast is less encouraging and that means many companies will struggle to deliver the kind of earnings growth we would expect in the US. With this in mind, market participants may need to be more selective in their investment approach.
It’s cheap for no reason
Investors actually want to find cheap stocks for no real reason. Companies like Diageo again Unilever they are interesting situations. They make most of their income overseas, but trade at a discount to their US counterparts.
There is a common sense of investing in it International Consolidated Airlines Group (LSE:IAG). This top-rated stock, rated high by statistical models, uses airlines such as Iberia, British Airways, and Aer Lingus. It operates markets throughout Europe, North America, and Latin America and – to a lesser extent – in Asia and Africa.
Despite working in partnership with American Airlinesfirmly entrenched in transatlantic routes, as well as having close to sector returns in the capital, the London-based company trades at a 25% discount to its nearest US peers.
In addition, with an increasingly fuel-efficient fleet, a strong fuel hedging record, and supportive conditions in emerging markets, IAG looks well-positioned to deliver strong returns to shareholders over time.
However, the company may be more exposed to the impact of regional conflicts than its American counterparts. Russia’s war in Ukraine has had an impact, making Europe-Asia routes more expensive. Further disruption and volatility in fuel prices caused by the conflict will not be good for IAG.
However, no investment is without risk. Some eagle-eyed investors may see this stock as unfairly undervalued.
What about being rich?
Discounted FTSE shares can be a great way to start building wealth. However, building productive wealth in the stock market can take time. Achieving the best returns in the market will undoubtedly put an investor on the path to wealth, especially as a compounding return over time.
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