Trading Strategies: a FTSE 100 share worthy of far higher valuation

While the FTSE 100 has surged 52% higher over the past five years, several of its members still have heavily discounted market valuations.

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

Their wide margins of safety could prove to be highly appealing, and not only because they provide scope for an upward rerating and capital growth potential over the long run. A low earnings multiple may also provide relative support to their share prices in the short run amid an increasingly uncertain economic outlook.

Near-term economic threats

Both the European Central Bank (ECB) and US Federal Reserve (Fed) raised interest rates this month in response to persistently elevated inflation.

Although the Bank of England left rates unchanged at 3.75% at its September meeting, FTSE 100 members generate over 80% of their revenues from abroad. This means that they are likely to be negatively impacted to at least some extent by the effects of tighter monetary policy in major developed economies.

Given that both the ECB and the Fed revised their inflation projections higher at their respective September meetings, it would be unsurprising for further interest rate rises to be ahead in the short term.

And with inflation in the UK set to hit 3.4% by the end of the year, up from 3.1% at present, a wide margin of safety on new and existing FTSE 100 holdings could prove to be highly worthwhile. They may be less susceptible to capital losses than higher-rated stocks that are priced for perfection during periods of weaker investor sentiment and elevated market volatility.

Upward rerating potential

Of course, buying heavily discounted stocks also makes sense from a long-term, capital growth perspective.

Given that the FTSE 100 currently trades on a price/earnings (PE) ratio of 17.7, index members that have earnings multiples of a fraction of that figure offer substantial upward rerating potential. Even if their PE ratios only rise to a similar level as that of the UK’s large-cap index, this could equate to a material rise in their share price.

• Stockwatch: is there still value in these winning shares?
• 10 hottest ISA shares, funds and trusts

Crucially, several such companies have sound fundamentals that suggest they are worthy of a far higher market valuation than at present. For example, in some cases they have only modest debts, while their net interest payments are well covered by operating profits. Furthermore, some undervalued members of the UK’s large-cap index have access to relatively large amounts of liquidity should a deterioration in the near-term economic outlook occur.

And with even heavily discounted FTSE 100 shares enjoying a notable competitive advantage in some cases, such as via high levels of customer loyalty or a dominant market position, their long-term financial prospects may be far stronger than their present market valuations suggest.

Long-term opportunities

Of course, history shows that near-term economic uncertainty is highly unlikely to last over a sustained period. Indeed, forecasts for inflation in the UK, US and the Eurozone still suggest it will materially decline next year and either meet, or be very close to, central bank targets within the course of the next two years.

This should provide scope for a return to monetary policy easing that, over the medium term, is likely to have a positive impact on the rate of GDP growth. Alongside an improvement in the operating conditions of FTSE 100 firms, falling interest rates could bolster investor sentiment and lead to a higher earnings multiple not only for the index but also for today’s heavily undervalued stocks.

As a result, focusing on shares that offer a wide margin of safety could be far more important now than it has been over recent years. Their low market valuations could provide a degree of support relative to the wider stock market over the short run, while offering greater scope for capital growth than the FTSE 100 index over the long term.

A wide margin of safety

Source: ShareScope, 22 September 2026. Past performance is not a guide to future performance.

For example, British Airways owner International Consolidated Airlines Group SA (LSE:IAG) trades on a forecast PE ratio of just 8.0. This is despite it posting a 148% share price rise over the past five years, thereby outperforming the FTSE 100 index by 96 percentage points, and suggests there is scope for a vast upward rerating over the long run.

Clearly, the company’s near-term outlook remains highly uncertain. On the geopolitical front, continued conflict in the Middle East could cause jet fuel prices to increase from already highly elevated levels. It may also lead to further disruption in the firm’s flights to and from, as well as through, the region.

This had a negative impact on the company’s seat capacity in the first half of the current financial year. A downgrade in the seat capacity growth outlook for the full year means it is now expected to be no higher than last year, which could act as a drag on IAG’s near-term financial performance.

Financial forecasts

Similarly, persistently high inflation across the company’s key markets of the UK, US and the Eurozone is likely to put continued pressure on consumer spending. When combined with monetary policy tightening in the US and the Eurozone, it may lead to reduced spending power over the coming months. This is likely to weigh on demand for discretionary items such as international holidays and, therefore, air travel.

• ii view: IAG steers steady course despite stiff headwinds
• Insider: massive buying at FTSE 100 giant and a recovery play

This is evidenced in IAG’s financial forecasts over the next couple of years. Although its earnings per share (EPS) is expected to be 10% higher in 2027 than it was in 2025, this slightly lags the typical mid-single-digit annual growth rate in profits among FTSE 100 members. Some investors may therefore argue that the stock does not currently merit a market valuation that is equal to that of the wider index.

Sound fundamentals

Over the long term, though, the company’s earnings multiple could realistically expand from its present low level as it benefits from the impact of a prospective fall in inflation and resulting potential interest rate cuts in its key markets.

The firm’s exposure to a broad range of geographic areas via its handful of airlines and a wide variety of price points, moreover, could further enhance its ability to capitalise on improved spending power and a more buoyant outlook among consumers than many of its more narrowly-focused sector peers.

• Fund Focus: the names on Artemis Global Income's heels
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

IAG’s financial position, furthermore, should allow it to not only overcome short-term economic challenges, but also continue to reinvest for long-term growth. Latest half-year results showed that net interest payments were covered nearly six times by operating profits in the first half of the current year. Its total liquidity, meanwhile, increased by roughly 9% year on year so that it now stands at over €11.8 billion (£11.1 billion).

Risk/reward ratio

Of course, IAG’s share price is still highly likely to display elevated volatility, potentially for a sustained period. Its heavily discounted market valuation, though, appears to adequately factor this in. The stock’s relatively low PE ratio also has appeal despite the presence of elevated geopolitical and economic risks that could yet worsen over the coming months.

After all, the business appears to be financially sound and well placed to benefit from an upbeat long-term economic outlook in key markets that should lead to growing passenger demand. Therefore, on a risk/reward basis, it appears to be attractive relative to the wider FTSE 100 index on a long-term view.

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