Stock market

Buy cheap FTSE shares, says HSBC

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It’s no secret that FTSE stocks are cheap and have been for quite some time now. Finally, investment banks are starting to take it seriously, as evidenced by the 11 percent increase. FTSE 100 during the last six months.

On May 20, HSBC A growing chorus of voices joined in. It upgraded British stocks to ‘overweight’ from ‘neutral’. This means it is recommending that its clients increase their investment in UK shares.

And he raised his target price for the FTSE 100 to 8,750 from 8,100, which would be 6% above the current level of 8,235.

Why has HSBC changed so quickly?

The investment bank cited several reasons for the upgrade.

First, he noted that FTSE 350 The index is cheap relative to its historical levels and other markets. In fact, he calculated that London’s discount to New York was currently 23 percent higher than normal.

This could lead to further mergers and acquisitions.

Second, he argued that higher commodity prices (benefiting FTSE miners), combined with a stronger US dollar (benefiting global firms), boosted performance.

Third, FTSE Dividend Yield and Share BuybacksOuter strip“Second market.

Finally, analysts said that “The long-term structure of UK pension fund sales has ended. They simply have no UK equity left to sell.

This last point is an interesting one. UK pension and insurance funds have reduced their exposure to UK equities from 53% in 1997 to just 4.2% today.

Collectively, institutional investors have estimated that £1.9trn London Stock Exchange According to HSBC, over the past three decades.

But how big could these remaining holdings be? Surely we are near the bottom in mass sales!

What to do?

Basically, there are two ways to approach this. First, I might just buy a broad-based FTSE 350 tracker fund to try to capture that potential value.

That is, I can buy the whole haystack instead of trying to find needles in it, to paraphrase index fund pioneer John Bogle.

Or I can try to find individual opportunities by focusing on undervalued stocks that I think can offer better long-term returns. This is how I approach things with my portfolio.

Production of Titanic

For me, a FTSE 100 stock that epitomizes deep value. British American Tobacco (LSE: BATS).

It is trading at a forward price-to-earnings (P/E) ratio of 6.5. This is a wide discount to its historical and peer group averages.

American rival indeed Philip Morris International Trading at a forward P/E multiple of 16.1!

That’s followed by a monstrous 9.8% dividend yield, while the firm has also pledged £700m to buy back its shares in 2024, then £900m for 2025. ITC.

Of course, due to ethical considerations, pension funds are unlikely to be reinvested in tobacco stocks. But I suspect that most of the institutional selling may end.

As always, the biggest risk here is the decline in overall cigarette volume, which could affect profitability in the coming years.

Even so, through 2026, the company still expects to achieve 3%-5% growth in organic revenue, while increasing core operating profit in the mid-single digits.

I’m buying the stock for about 10% of its yield to increase my passive income.


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