Is it time to look again at UK shares?

Our writer explains why October’s Budget has led him to question his commitment to some UK shares. But what should he do about it?

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As someone who invests primarily in UK shares, I was disappointed by last month’s Budget. Most economists appear to agree that the chancellor’s announcements are likely to leave interest rates higher for longer.

Although the Bank of England (BoE) reduced the base rate by 0.25% (7 November), the government’s decision to borrow another £32bn over the next five years means the pace of future cuts is likely to slow.

Indeed, UK 10-year gilt yields are currently (8 November) 0.4% higher than they were two weeks before the Budget. This benchmark’s used to price mortgages and other loans so it’s a good indicator of future borrowing costs.

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This makes me wonder whether I need to change my approach. In a higher interest rate environment, now could be a good time for me to focus on UK stocks with lower levels of borrowings.

To clarify, my definition of debt excludes lease labilities. That’s because there’s usually a corresponding asset on a company’s balance sheet for this type of debt.

Currently, there are three FTSE 100 stocks with no borrowings.

Strong balance sheets

Healthy cash flows have historically helped Persimmon (LSE:PSN) avoid the need to borrow. And with no interest to pay, this means there’s more cash left over for shareholders. In recent years, the housebuilder’s paid out nearly all its profits in dividends.

And when the BoE started to cut interest rates, many thought this would help boost demand for its properties. Indeed, it expects to build 5.8% more homes in 2024 than in 2023. And its order book’s 17% higher than a year ago.

However, I wouldn’t want to invest at the moment. And that’s unfortunate given that I already own shares in the company!

The uncertainty over the future direction of interest rates makes me think that the recovery in the housing market could slow. And I think the government’s decision to reduce the stamp duty threshold for first-time buyers isn’t going to help.

Also, I was concerned when the company said in its trading update on Wednesday (6 November): “We are seeing some signs of build cost inflation beginning to emerge in price negotiations for 2025”.

Unsurprisingly, this sent the company’s shares sharply lower.

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Another debt-free company is Rightmove. But as the owner and operator of the UK’s largest property website, it’s also likely to be adversely affected by higher interest rates.

Auto Trader Group‘s the third member of the Footsie with no outstanding loans or overdrafts. However, Budget tax increases will impact on the profitability of car dealers, which could reduce their marketing spend. Also, higher borrowing costs will reduce disposable incomes and leave less headroom for drivers to change their vehicles.

What should I do?

But I haven’t lost confidence in UK shares as I’ve long believed them to be attractively priced compared to, say, those on the other side of the Atlantic.

While I had thought other investors would be attracted by some of the FTSE ‘bargains’ currently on offer, I don’t think the Budget’s helped improve sentiment.

Yet I still see potential. I’m going to consider other stock markets, but I’m also going to focus on UK shares with less exposure to the domestic economy when I’m next in a position to invest.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Persimmon Plc. The Motley Fool UK has recommended Auto Trader Group Plc and Rightmove Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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