UK shares are well represented within my portfolio. It’s works well for me as I focus on earning dividends and reinvesting them over time — it’s a compound returns strategy.
The FTSE 100 might be pushing upwards and is once again nearing 8,000. But I don’t think that tells the full story. Many stocks in the UK are trading at incredibly low valuations. And this offers us a unique opportunity to buy stocks at knockdown prices.
Let’s explore why.
Depressed sectors
Certain areas of the market are trading at impressive discounts. So which are they? Well, I’m focusing on financial stocks, including banks and housebuilders.
Financial stocks in the UK haven’t been that popular with investors for some time. But the Silicon Valley Bank (SVB) fiasco in March sent stocks crashing. Barclays, HSBC, and Standard Chartered were among those to fall 20%, and more.
These stocks have gained since, after investors realised that the unique circumstances that downed SVB were unlikely to impact major banks in Europe.
But it wasn’t just banks that were impacted. Insurance, pensions, wealth management and other companies were heavily affected. Phoenix Group was among those stocks that fell more than 10%.
The key feature linking all these stocks is that they’re very different from the failed SVB. Well-managed financial institutions hedge interest rates and have strong liquidity coverage — SVB didn’t.
Meanwhile, housebuilder stocks were also impacted by the SVB crash — investors suspected a credit crunch might follow. But housebuilders slumped towards the end of last year as conditions deteriorated.
Companies like Persimmon are now trading near their 10-year lows. But conditions are starting to improve. Actually, I’ve just received a mortgage quote and the interest rate is down on my January quote. And this has been reflected in private sales data.
It really could be a once-in-a-decade chance to buy housebuilders at these prices. I’d also suggest that panic-engendered corrections of financial stocks don’t come all that often. It’s a great time to buy, in my opinion.
My picks
The above sectors are largely where I’m focusing my investments. After all, as a value investor, it’s certainly easier to find undervalued stocks in depressed parts of the market.
One of my top picks is Barclays. I’ve been topping up over the past two months as the share price has gradually ticked upwards after the SVB shock. The company trades at just five times earnings and I think the broad outlook for the company is positive.
At the moment, interest rates are very high, and I’m a little concerned about the size of the group’s impairment charges. But I’m buying for the medium term during which Bank of England interest rates are forecast to fall to 2-3% — this is ideal for banks.
At slightly lower rates, we can expect net interest income to remain strong, but impairment charges will likely fall.
I’ve also been topping up of FTSE 100 stalwart Legal & General as well housebuilder Vistry. The latter has reported improving private sales data, but also has some insulation from the current challenging conditions in its ‘partnerships business’ — affordable homes.
