Is now a good time to invest in undervalued FTSE 100 shares? Morgan Stanley certainly thinks so.
In fact, their analysts are confident that UK shares are the cheapest in the world at the moment. And I don’t see many reasons to doubt that.
Inflation is subsiding
A few months ago, the US investment bank told its clients that the shares are cheap because investor sentiment towards the UK is negative. But it went on to outline that the pessimism could shift provided inflation begins to decrease.
Since then, inflation has been cooling. In fact, annual inflation dropped to a 15-month low in July. According to the ONS, the Consumer Prices Index (CPI) rose by an annual rate of 6.8%, down from 7.9% in June and 11.1% in October 2022.
The Bank of England now expects inflation to fall to around 5% by the end of 2023. It then expects it to keep on falling before reaching the 2% target by early 2025.
Crucially, this means that the uncertainty in the markets caused by rising prices of goods and services could be set to subside.
Plenty of investment opportunities
FT Alphaville (the commentary service for financial market professionals created by the Financial Times) is taking a slightly more measured approach than Morgan Stanley.
Their writers stated in August that several reasons explain why London is underpriced by world standards. For example, there’s the impact of Brexit and the recent strength of the pound.
Nonetheless, they argued that some good opportunities stand out, particularly given the defensive argument for large caps and the growth-based one for small caps.
Either way, UK shares won’t stay cheap for long if the outlook for the economy is strong.
Confidence in the UK economy
At the beginning of September, the release of new data showed that the economy surpassed its pre-COVID size in late 2021.
This represents a much earlier recovery from the pandemic than previously estimated and puts the UK ahead of other major European countries.
On top of this, a better outlook for energy prices, a more resilient global environment, and continued tightness in the labour market look set to bolster the economy.
In my eyes, numerous elements conducive to a bull market are in place. And if it happens, now could be a once-in-a-decade chance to hoover up some cheap FTSE 100 shares.
Wary of value traps
However, I think it’s vital to approach this potential opportunity with caution. After all, not all cheap shares are undervalued, and some may be experiencing price declines for valid reasons.
With this in mind, I’m on my guard against falling into value traps, where stocks appear cheap but continue to underperform due to fundamental weaknesses.
As a result, careful stock selection and a long-term investment horizon will remain crucial if I’m to harness the full potential of undervalued FTSE 100 shares.
