Sweet spot! Super-cheap UK shares set to boom as inflation falls and stock markets rise | Personal Finance | Finance

Inflation is still running rampant in the UK, holding steady at 8.7 percent in May. It’s expected to fall slightly when June’s figure is announced next Wednesday, but only to around 8.2 percent. That’s still one of the highest rates in the developed world.

It’s a different matter in the US.

Its June inflation figure was published last Wednesday and showed price growth falling to just three per cent, lower than expected.

That’s a huge drop from its peak of 9.1 percent in June 2022.

Stock markets loved it. London’s FTSE 100 index ended Wednesday almost two percent higher, as investors celebrated the long-awaited sign that inflation rate is finally on the run.

Yet interest rates won’t stop falling yet.

The US Federal Reserve is expected to hike interest rates again at its meeting later this month, by 25 basis points to 5.5 percent, just to be sure.

Analysts are calling it a “once more and done” decision. If inflation continues to slide, the Fed will stop hiking rates and start cutting them instead.

That will ease the pressure on consumers and busineses, and fire up share prices.

The US stock market is already in a bull run, with the S&P 500 up 17.82 percent year-to-date and more than 20 percent since last October.

That’s a stunning return given all the gloom out there. Savings rates may be at 15-year highs but stocks and shares can still make people serious money.

As Victoria Scholar, head of investment at Interactive Investor points out, the US bull run has been driven by just seven overhyped US tech stocks that investors hope will benefit from the artificial intelligence revolution. 

FTSE 100 performance has been disappointing lately, with the index trading at similar levels to five years ago. That could be about to change.

While UK blue-chip companies pay generous dividends of anything between 3% and 10% a year, share price growth has been in short supply.

As I wrote recently, pension and stocks and shares Isa investors have abandoned the cheap and hated UK stock market to seek greater returns elsewhere.

There are plenty of reasons to shun the UK. Inflation is rampant. Growth is in short supply. Politics are a mess. The nation’s finances are in tatters.

As a country, we’re simply not as rich as we used to be.

The UK still plays host to big-name companies such as oil giants BP and Shell, big banks Barclays and HSBC, as well as Aviva, Tesco, Unilever, Vodafone and many more.

Companies listed on the index generate more than three quarters of their earnings overseas, giving them a real global reach.

The UK has had a tough time, but it’s not dead yet. And because our shares are so cheap they could climb much higher when investors finally stop hating them.

READ MORE: Britain’s best stock has turned £1k investment into incredible £456k

Last week, investors saw the light. A host of top stocks jumped almost 10% and in some cases more, including Antofagasta, JD Sports Fashion, Flutter Entertainment, Smurfit Kappa Group and housebuilder Persimmon.

Yet FTSE 100 shares still trade on a low average valuation of just 8.6 times earnings. Traditionally, 15 times is deemed fair value, so that’s really low.

By contrast, the US market now looks overpriced trading at a blockbuster 31.4 times earnings. At some point, the UK has to play catch up.

This could be the moment. Even the normally sober FT ran an article yesterday headlined: “Admit it, markets are in a sweet spot”.

Many British investors have abandoned the FTSE but now could be a good time to revise that decision. The biggest gains are always made right at the start of the recovery.

As ever, investing is never guaranteed. The FTSE 100 could easily sink back into it slumbers, and go nowhere for the next few years.

The US is likely to beat it over the longer run.

So only invest if you are willing to risk your capital. Otherwise plenty of top savings accounts pay up to six percent, with no risk.

But today’s sweet spot does look tempting.