With the outlook for the UK economy improving, I’ve been looking for UK shares to buy for my portfolio today. I think there are plenty of companies out there at this point, which offer me attractive risk/reward profiles and a way to invest in the recovery.
UK shares to buy
The first company on my list is mining giant Rio Tinto (LSE: RIO). Thanks to the rising demand for steel around the world, the price of iron ore has jumped in recent months. This has translated into huge profits at Rio, the world’s largest producer.
Rio’s size also gives it a considerable cost advantage. It can produce a tonne of iron ore for below $15. Only BHP can do it for less. With its low production costs and iron ore prices surging, Rio recently announced a record dividend to investors.
Unfortunately, there’s no guarantee this can continue. Commodity prices can and do fall as fast as they rise. Just because Rio is earning record amounts today doesn’t mean it will continue to do so. The business also faces environmental challenges, which could increase costs in the years ahead.
As the world rebuilds from the pandemic, I think it’s highly likely (although not guaranteed) iron ore costs will stay elevated as the demand for steel remains high. That’s why I’d buy Rio for my portfolio today.
Another construction sector investment I believe is one of the best UK shares to buy today is Morgan Sindall (LSE: MGNS). The government has outlined plans to spend tens of billions of pounds on infrastructure projects over the next few years. It will need partners to help deliver these projects.
Morgan’s management believes the company is “well positioned to benefit from attractive UK investment trends.” It already has a healthy order book of business. At the end of its 2020 financial year, the firm’s order backlog stood at £8.3bn, up 9% year-on-year.
Despite these opportunities, the group will face challenges as well. Construction is a low margin business and, as the investors of Carillion found out, a company’s fortunes can change overnight in this sector if creditors start to withdraw their support. So, I’d buy the stock for my portfolio today, but I’d also keep a close eye on its financial performance.
Government support for the housing market has helped prop up property prices over the past 12 months. It doesn’t look as if this support is going to be withdrawn anytime soon. I think that’s incredibly positive for the likes of Redrow and its peers, all of which have shown a preference for rewarding shareholders with large dividends.
That said, the housing market can be incredibly unpredictable. It’s propped up by debt and is, as a result, extremely sensitive to interest rates. A sudden increase in interest rates over the next few years may send property prices lower, which could spark a more significant slump in home prices. This would have a knock-on effect on housebuilders.
Looking past these risks, I’d buy the stock for my portfolio today, considering its long-term potential.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Redrow. 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.