Following the recent volatility, which has largely pushed shares downwards, I’ve been on the lookout for stocks to buy. There’s good reason for this. Having hovered around 7,500 for much of August, the FTSE 100 fell as low as 6,800 this month. As a result, there’s a host of quality stocks trading at knockdown prices.
The return of stability
I take long positions when investing but, like many others, I was a concerned with damage-limitation before and during Liz Truss’s premiership. A host of arguably reckless fiscal policies sent the markets into freefall.
But now things are looking more stable, although the markets haven’t recovered. Rishi Sunak’s rhetoric suggests a much more responsible fiscal policy, which will result in less government borrowing and, hopefully, less need for the Bank of England (BoE) to hike interest rates.
While we will have to wait a few weeks for the budget, it looks like the market will remain fairly stable, albeit at a depressed rate, until we know exactly what the government’s plans are.
Big winners
Banks tanked in September and October after the mini-budget spooked markets and rumours suggested Truss was looking to use quantitative easing to avert a £10bn payout to banks. And then there were concerns that the BoE would need to hike interest rates even higher following the inflationary budget. As rates rose, some banks took lending products off the market.
But now, the medium-term future for banks appears to be in a much more stable. There are still concerns about recession and the impact this will have on credit quality. However, interest rates are likely to remain high, but will unlikely grow at a rate that is prohibitive to lending.
Higher rates mean higher Net Interest Margins (NIMs). This is a big deal for banks. For over a decade we’ve had near-zero base rates.
I’m looking to add more HSBC shares to my portfolio. It’s trading near its 52-week low, and despite concerns about the macroeconomic environment, it’s recently outperformed analysts’ predictions. The bank posted a pre-tax profit of $3.15bn for the three months to 30 September, down from $5.4bn last year, but above the $2.45bn consensus analysts estimated.
The bank also has a handsome dividend yield of 4.3% and trades with a price-to-earnings (P/E) ratio of eight. It’s more expensive than Lloyds — which I also like right now — but it’s more diversified, increasingly focusing on high growth markets in the Far East.
Housebuilders are arguably up against it right now, but with Truss’s premiership over, things are looking a lot more rosy. Cost inflation is set to be 5% next year while house prices are expected to remain flat. That’s clearly not good news, but housebuilder stocks are down massively.
Crest Nicholson is a top pick for my portfolio. The property developer had a year’s worth of profits wiped out by the cladding crisis. It’s now trading 44% down over 12 months and down 65% over five years. And I think it’s now starting to look cheap. It has a P/E ratio of just 5.9 and I think its focus on higher-end housing in the south of England will likely insulate it from demand-related challenges.
