Don’t write off UK stocks: two undervalued FTSE 100 shares

The UK faces a highly uncertain economic and geopolitical near-term outlook. Indeed, high energy prices are widely expected to prompt a surge in inflation over the coming months. The Bank of England already said in its latest Monetary Policy Report that the annual rate of price rises could reach over 6% next year in its worst-case scenario.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

This could lead to tighter monetary policy, with interest rate rises still a possibility depending on the outcome of peace talks between the US and Iran. In turn, monetary policy tightening may act as a drag on the UK economy’s growth rate.

There is also heightened uncertainty on the UK political front. The possibility of a new prime minister following recent local elections is likely to persist over the coming weeks and could even gain traction depending on the upcoming by-election result in Makerfield.

The prospect of a potentially revised fiscal policy under a new leader could cause heightened stock market volatility as market participants factor in a period of possible instability.

Relative appeal

While elevated geopolitical and economic risks over the short run may naturally prompt some investors to avoid UK-listed shares, the FTSE All-Share index could still offer a favourable risk/reward opportunity on a long-term view.

Crucially, the UK stock market is relatively cheap. The FTSE 100, for example, has a price/earnings (PE) ratio of 16.9, while the FTSE 250’s earnings multiple stands at just 13.9. Both figures compare favourably to their developed market peers, with the S&P 500, DAX and Nikkei 225 having PE ratios of 30.3, 18.7 and 21.8, respectively. This suggests there is scope for upward reratings, and therefore capital gains, among UK-listed stocks.

Furthermore, several developed markets face a similarly uncertain outlook to the UK. This means that the valuation discrepancy between their stock markets is difficult to fully justify.

High energy prices are already putting upward pressure on inflation in the US and the Eurozone, for example, with their annual rate of price rises currently amounting to 3.8% and 3%, respectively, versus 2.8% for the UK. Given that further increases in inflation could be ahead, it would be unsurprising for the Federal Reserve and the European Central Bank to implement a tighter monetary policy than previously expected, thereby potentially weighing on future GDP growth.

• FTSE 100 ex-dividend dates: June 2026
• Stockwatch: are Diageo shares really a recovery play?

Separately, the international exposure of the UK stock market makes it even more difficult to justify its comparably low valuation. For example, around 80% of the revenues of FTSE 100 firms are generated outside the UK, while the figure stands at roughly 55% for the FTSE 250 index.

Even if the UK’s economic and geopolitical outlook are more challenging than those of other major developed economies, the global focus of the FTSE 350 index suggests that it should trade at a more equitable level than at present vis-à-vis its peers. This further suggests that UK stocks could be undervalued at current prices.

Economic forecasts

Of course, the UK’s near-term economic outlook could be more upbeat than many investors realise. Indeed, the International Monetary Fund (IMF) forecasts that UK GDP will expand by around 2.3% in the two years to the end of 2027.

Although this is some way behind the US economy’s forecast growth rate of 4.5% in the same period, it is in line with the expected growth rate of the eurozone and ahead of Japan’s 1.3% forecast expansion over the same time frame. This further suggests that UK-listed stocks could be undervalued, since their UK exposure may in fact fail to have a detrimental impact on their financial performance.

Indeed, there is a plethora of high-quality companies in the FTSE 350 index. In many cases they have modest debts, a competitive advantage and upbeat long-term earnings growth prospects. Although their share prices could prove to be volatile in the short run as elevated geopolitical and economic risks are likely to persist, their relatively low valuations could equate to strong capital gains over the coming years.

Source: ShareScope at 2 June 2026. Past performance is not a guide to future performance.

Marks & Spencer

For example, FTSE 100 member Marks & Spencer Group (LSE:MKS) currently trades on a PE ratio of 15.5. This is lower than the UK large-cap index’s earnings multiple even though the food, home and clothing retailer, which generates around 96% of its revenue domestically, recently reported a 25% decline in earnings per share (EPS) as a result of a cyber attack that caused severe disruption to operations in its latest financial year.

Encouragingly, the company’s annual results showed that it experienced a return to sales and profit growth in the second half. Furthermore, it is forecast to post a 42% rise in EPS in the current financial year, with an additional 9% increase in its bottom line anticipated in the next financial year. Given that its forward earnings multiple using next year’s forecast EPS figure amounts to just 10.9, there seems to be scope for a material upward rerating and, therefore, capital growth over the medium term.

• M&S predicts return to profit growth
• Don’t miss the next big IPO: get the latest IPO news and updates straight to your inbox
• BT bull issues new share price target

Clearly, Marks and Spencer’s share price could prove to be volatile in the short run. The economic challenges facing the UK - a forecast rise in inflation and possible interest rate increases - could negatively affect real-terms wage growth and, therefore, consumer spending in the coming months.

The company’s fundamentals, though, appear to be sound. For example, it has a net debt-to-equity ratio of 75%, while its net interest costs were covered 3.1 times by operating profits in its latest financial year even after its slump in profitability. This suggests it is well placed to both overcome a potentially challenging period for the wider retail sector and continue to reinvest for long-term growth.

British Land

Similarly, fellow FTSE 100 constituent British Land Co (LSE:BLND) appears to offer a favourable long-term investment outlook. The real estate investment trust (REIT), which has a diverse portfolio focused on offices in central London as well as retail parks across the UK, trades on a price/book (PB) ratio of just 0.7. This suggests that after falling by around 20% over the past five years, the company’s shares offer a wide margin of safety and scope for an upward rerating.

The trust’s recently released full-year results showed that while EPS rose by just 1% year on year, it expects net profits to increase by 6% in the current financial year. Furthermore, the firm anticipates that EPS will subsequently rise by 3-6% per annum. This further indicates that it offers good value for money at its current price level.

• British Land’s ‘compelling fundamentals’ imply big upside
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• British American Tobacco on track as next-gen forecasts upgraded

Alongside this profit growth potential, British Land’s dividend yield of 5.8% is around 260 basis points higher than that of the UK’s large-cap index. As well as flagging its income potential, this suggests that the REIT’s total returns could be relatively attractive.

Although the company’s loan-to-value (LTV) ratio rose by 110 basis points to 39.2% in its latest financial year, it still appears to be financially sound. And with a solid M&A strategy, which includes the recycling of capital into more productive assets, the company appears to be well placed to take advantage of long-term growth opportunities.

Clearly, British Land’s shares could remain out of favour among investors given the uncertain near-term outlook for the UK economy. However, as per Marks and Spencer, its low valuation appears to both sufficiently compensate investors for this risk and provide scope for worthwhile capital gains over the coming years.  

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.