Beneath the headline values of the major indices, many UK shares have been dropping recently. And because the FTSE 100, the FTSE 250 and others have remained comparatively steady, the dip in stocks has perhaps been less obvious than it might have been.
That’s why some people have termed it a ‘stealth correction’. But the drop is clear when we look at individual stocks, such as fashion retailers Boohoo and ASOS. And some of the previously hot stocks have seen froth blown from their valuations, such as Deliveroo and Wise.
However, the correction hasn’t been confined to racy stocks. Many cash-generating defensives are down too, such as Reckitt Benckiser, Nichols, Unilever, Britvic, PZ Cussons, Cranswick, Tate & Lyle and AG Barr.
Surging commodity prices
It’s tempting for me to speculate about why this setback might be happening. And one top-of-the-head idea is that it could be because of the surge in the price of many hard and soft commodities. Indeed, those increases tend to filter through to make lots of services, materials and goods more expensive.
That likely means the companies I’ve mentioned are facing rising input prices. And, on top of that, many have been affected by the well-reported supply chain issues.
Not all commodity prices have risen this year but, in some cases, the problem’s quite dramatic. For example, since 1 January, the price of oil is up around 60%, natural gas is about 100% higher, copper’s risen by 18%, aluminium by about 50%, oats 90%, and wheat by around 25%.
My guess is UK share prices have declined because investors are worried that rising input prices could squeeze company profits. And that’s a reasonable assumption in the short term. But one of the great things about many businesses is they have the ability to raise their selling prices. And when they do that, it can help to preserve profit margins in the face of rising costs.
And in the current environment, I reckon it could be quite easy for companies to do so. After all, everything has been going up in price and we’re all having to get used to it.
An opportunity to buy quality stocks
So, in the medium-to-long term, I don’t see rising commodity prices as a threat to many businesses. However, I do think the stock market’s prone to overreact to news like this. And that means short-term falls in stock prices could present an opportunity for me to buy quality stocks at better valuations when measured against the prospects of the underlying businesses.
One of my guiding lights is the philosophy of super-investor Warren Buffett. He’s known for buying stocks when the economic news is a bit unsettled. And that’s because he knows valuations will likely be at their keenest under such conditions. However, a cheaper valuation doesn’t guarantee a positive investment outcome. Indeed, all shares carry risks, and I could be wrong in my analysis.
However, I think it’s a great time to invest £500 a month in a Stocks and Shares ISA. And within it I’d aim to buy stocks such as those I’ve already mentioned here, after doing my own thorough research.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended AG Barr, ASOS, Britvic, Deliveroo Holdings Plc, Nichols, PZ Cussons, Reckitt plc, Unilever, and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.