UK stock market: cash in on undervalued companies

Bank of England building abstract art design — (Image credit: Getty Images)

UK equity markets are in a decent position as we move through 2025. Our bottom-up analysis points to upside of around 6% from today’s level for the FTSE, which makes the UK market attractive relative to both the rest of Europe and the US.

Granted, the macroeconomic environment remains uncertain: growth forecasts by the Bank of England for 2025 were halved recently.

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Firm foundations

We believe that Persimmon (LSE: PSN), Britain’s second-largest homebuilder, is a great way to play the structural mismatch between supply and demand in the UK housing market.

The stock has lost two-thirds of its value since its peak four years ago. Rising interest rates and consumers’ stretched wallets contributed to its decline, but we think supportive conditions have already arrived, and the company has turned a corner.

Demand from homebuyers is picking up as interest rates in the UK fall and home ownership becomes more affordable. The new Labour government has introduced policies that are highly supportive of the homebuilders, which should be conducive to increased building in the medium term.

Over the longer term, demographics, including longer life expectancy, play a supportive role. In the meantime, investors can benefit from a dividend yield in excess of 5%.

BP is a good bet

Oil giant BP (LSE: BP) is finally adjusting its strategy and increasing investment in traditional oil and gas projects. It is also reducing the speed at which it hopes to transition to clean energy.

That is bad news for environmentalists, but the move should create more value for shareholders in the medium term.

The company is also reducing structural costs and pivoting towards higher-margin projects, which should lead to higher profitability in the future.

Our estimate of the stock’s fair value is 20% above the current price, while a dividend yield of nearly 6% means investors can get paid to wait for the share price to appreciate. Add to this the potential for BP to be taken over, as per the current speculation in media quarters, and BP is a good bet for investors.

Poised for recovery

The luxury sector has taken a beating over the last couple of years, and Burberry Group (LSE: BRBY) has not been spared. The pandemic-induced appetite for luxury goods shopping has ended, and demand from Chinese consumers in particular has dissipated, but we see a lot of value in brands such as Burberry.

We believe that the luxury-goods market is cyclical and see the current malaise as part of a downturn rather than a permanent demise. We think that Burberry, a leading luxury-goods maker, can help itself to a large degree through cutting back on capital expenditure, which should improve cash flows.

In the medium-term, we believe the group will eventually benefit from a rebound in demand for luxury goods. The shares could go up by as much as a third.

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Chief Equity Market Strategist, EMEA, Morningstar