Markets have been nervous lately due to problems in the banking sector, notably in the US and Switzerland. That has pushed down the price of some UK shares to levels I find tempting.
For example, as I write on Monday morning, I can buy M&G shares at a price that offers me a prospective yield of 11.5%. For a FTSE 100 company that raised its annual payout 7% this month, that sounds appealing to me!
But I think current stock market volatility is signalling investor nervousness about the economic outlook. The proposed takeover of Credit Suisse is at a value far below its recent share price and with some bondholders losing out heavily. That could lead to shocks reverberating around global stock markets this week and beyond, in my view.
So ought I to buy what I think are bargain UK shares now – or wait to see what happens next?
I’m waiting
In short, I have no plans to wade into the stock market in the next couple of days even though some shares look like bargains to me.
Take Legal & General as an example. The FTSE 100 insurer has been on my watchlist for a while. I have been hoping to add it back into my portfolio at an attractive price. This morning I could buy the shares on a price-to-earnings ratio of 6, with a dividend yield of 8.8%. That looks really tempting to me.
Wait and see
But there is a reason UK shares like M&G and Legal & General are losing value. Investors are trying to assess what comes next for the global economy – and the answer looks increasingly difficult to predict.
A lot of people had never heard of Silicon Valley Bank at the start of this month despite its size, but Credit Suisse is a major Swiss bank. It has effectively imploded in a matter of days, despite receiving a massive liquidity boost just last week from the Swiss central bank.
That has made me more nervous about what the coming year or two might hold for markets. Banking relies on confidence. Lately, confidence has been getting more fragile. It is possible that other banks with solid businesses could get caught up in the current crisis, despite having strong balance sheets.
That helps explain why financial services shares are struggling at the moment. But why am I also not currently planning to buy other UK shares at apparently bargain prices this week?
A banking crisis could have major implications for other sectors, from a drying up of credit necessary to run a business to a fall in consumer confidence that hurts sales. To assess whether a company is a bargain, I like to look at what I think its long-term prospects are. That is harder to do right now, given the dramatic, fast-moving events we have seen lately in the global banking sector.
Getting ready
Still, I do maintain a shopping list for the next stock market crash, whenever that might be. So if the price of a given share on that list falls far enough in coming days or weeks, would I be willing to buy?
I would — as long as I felt the price I was paying for each share was significantly below what I thought its long-term value should be.
