2023 has been a tough year for UK shares and I expect more volatility before the long-awaited stock market rally.
But when it arrives – as it inevitably will at some point – I want to be ready for it. I don’t want to end up kicking myself for failing to buy bargain UK shares today. I want to get in right at the start of the recovery.
Since timing the market is impossible, this runs the risk of buying shares too soon and seeing them fall before they climb. I will mitigate this into two ways. First, by spreading out my purchases over the next month or two. Second, by investing with a minimum 10-year view, to give my stock picks time to recover. Some of them need it.
I’m racing ahead of the cycle
With £5,000 at my disposal, I’d look to buy five different stocks. As well as spreading my risk, this would help me capture different parts of the economy. Also, it’ll make my portfolio more fun to monitor.
The commodity, property, consumer discretionary and financial services sectors are all cyclical sectors that should lead the upturn, so I’m targeting them. To narrow my focus, I’m looking for stocks that have fallen at least 25% over the last 12 months.
Which instantly throws up Anglo American. The mining giant recently cut its dividend by half as commodity prices and profits slip, along with China’s growth prospects. Yet today’s challenging conditions look priced in as the stock is valued at just 5.69 times earnings. It’s risky but should prove rewarding, over time.
The UK property sector is a scary place as the mortgage crunch intensifies but I still don’t expect a full-blown crash with property in such short supply. Buying housebuilder Persimmon is nonetheless a brave call as it reported a 66% drop in profits to £151m yesterday.
Yet its share price has been climbing in recent weeks as investors bet the worst will soon be over. Again, I’d have to give it several years to fully recover, but that’s the point here.
I’d back it up with a different kind of property stock, retail and logistics developer British Land. It recently slipped into the FTSE 250 but is benefiting from strong rental income while its retail parks are withstanding the consumer downturn. It offers a 6.77% dividend yield as well as bounce-back potential.
On the right road
FTSE 250-listed online rail ticket seller Trainline is getting back on track after reporting a 75% jump in full-year revenues as European routes open up to competition, boosting ticket sales. And that’s despite UK rail strikes. It looks pricey, trading at more than 30 times earnings but those earnings are rising fast, up 121% to £86m last year. It could take my £1,000 a long way, given time.
Finally, a financial services company. FTSE 250-listed Liontrust Asset Management has been hit by investor outflows and uncertainty over its £96m acquisition of Swiss asset manager GAM, but could roar again when the stock market rally arrives. Liontrust maintained its dividend despite a dip in profits and it now yields a whopping 11.04%.
All five cyclicals promise further bumpiness. Yet over my lengthy timeframe, I’d hope they’d turn my £5k into something a lot more substantial.