The outlook for the British economy is looking increasingly grim. So I need to think carefully before buying UK shares to put in my Stocks and Shares ISA.
Data on Friday showed the domestic economy shrank 0.2% between July and September. This is likely the beginning of a recession that the Bank of England has tipped to last until mid-2024.
In this landscape, profits at UK-focused shares might flatline, or even fall sharply. As a consequence, share prices may remain under extreme pressure and dividend levels might also disappoint.
UK shares are cheap!
The prospect of a long and severe recession hasn’t just emerged however. And it hasn’t altered my investment strategy in 2022.
I’ve continued to buy FTSE 100 shares as well as companies inside the more UK-focused FTSE 250 for my ISA. I plan to keep adding to my shares portfolio too. This is because many British stocks now offer excellent all-round value.
Tom Stevenson, investment director for personal investing at Fidelity International, admits that a long recession “is bad news for investors in the UK stock market.” But he adds that “the news comes as a surprise to no-one and it has already been priced into shares.”
He notes that London Stock Exchange shares trade on a forward price-to-earnings (P/E) ratio of just 9 times. This is far below an average of 17 times for US shares.
Stevenson adds that the prospective dividend yield for UK shares also sits at 4%. This is “twice as high as on the other side of the Atlantic,” he says.
Is the upturn imminent?
Many investors wait until economic conditions have improved before jumping in. But timing the market upturn directly is more a matter of luck than skill. And those who delay can end up missing the boat.
As Stevenson says: “Markets don’t wait for the dawn to break; they start to rise at the first hint that better times are on their way.” He adds that “this could come as early as next year.”
Of course, that doesn’t mean jumping in blind as researching potential buys is a must. And we all need to be aware of the risks because stock market returns aren’t guaranteed and losses can be made.
Moving fast
Yet if a UK share I’ve researched and like is trading at a bargain-basement price I’ll buy it straight away. I won’t hold on to see if I can get it a bit cheaper.
The most important thing is to get the ball over the net, as they say. As Sam North, analyst at social investing site eToro, recently commented: “Time in the markets beats timing the markets. And on the whole, they go up more than they go down.”
Stock market volatility can be unnerving. Nobody likes to see their stock holdings sink in value, even those who invest for the long haul.
But investors who hold firm and keep buying shares during downturns can boost their chances of making great returns. This is how hundreds of Stocks and Shares ISA holders became millionaires in the years following the 2008 financial crisis.
