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?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest £1,000 in Greggs Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Greggs Plc made the list?

See the 6 stocks

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.

Created with Highcharts 11.4.3Persimmon Plc PriceZoom1M3M6MYTD1Y5Y10YALL9 Nov 20196 Apr 2025Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '25202020202021202120222022202320232024202420252025www.fool.co.uk

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.

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

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.

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »