The concept of finding a cheap entry point in the market is a strategic way to invest in good companies. This approach has been evident in the recent global sell-off, where investors quickly took advantage of price dips to buy shares in tech giants. Despite concerns raised by hedge fund Elliott Management about Nvidia being in bubble territory, the market seems to be holding strong.
However, it’s important to note that low prices do not always translate to good value. Negative sentiment can sometimes lead to undervaluation of companies and the market as a whole. In the UK, factors like post-Brexit uncertainty, political instability, weak economic growth, and high inflation have contributed to low stock market ratings.
On the bright side, the UK market has shown signs of improvement, with the FTSE 100 hitting an all-time high this year. The market’s forward price/earnings ratio has fallen to around nine, below its long-term average. Despite global exposure, the UK market is benefiting from a healthier macroeconomic environment, with inflation back on target and the Bank of England implementing rate cuts.
Economic stability, along with political stability, is expected to attract investors back to the UK market. Strong economic growth, rising consumer spending, and steady employment rates are positive indicators for businesses. With inflation expected to remain around 2%, real household incomes are projected to continue growing steadily.
In contrast, the US market remains a strong attraction for investors, trading at an above-average forward earnings ratio. Capital Economics predicts that a significant rotation out of US equities is unlikely until the tech bubble bursts, which may not happen until 2026. On the other hand, the UK market is showing signs of growth, with earnings expected to rise in the coming years.
Deutsche Bank’s earnings review indicates that while FTSE 100 first-half earnings declined overall, many companies surprised to the upside. Second-half earnings are expected to grow by around 10%, with a consensus for a 5% rise in full-year earnings for 2025. Deutsche Bank views the FTSE 100 as having the best risk-return profile among European main indices and expects small-cap earnings to outgrow large-cap earnings as the economy recovers.
In conclusion, the UK market is poised for growth as economic and political stability improve. With strong growth and rising earnings, the UK market is likely to attract more investors in the coming years.