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UK shares: buying opportunities for after the storm

As stock markets stabilise in the wake of a sell-off on global growth and debt fears, and Britain’s FTSE 100 wriggles out of bear market territory, investors are looking for buying opportunities.

 
UK shares: buying opportunities for after the storm

As stock markets stabilise in the wake of a sell-off on global growth and debt fears, and Britain’s FTSE 100 wriggles out of bear market territory, investors are looking for buying opportunities.

Of course, your stock and sector picks depend on your view of the prospects for the world economy.

Strategists at Deutsche Bank said on Tuesday that the level of the Euro Stoxx 600 index – which had lost 16% since late July – was consistent with global growth of 2.5% next year. But they warned that if US economic growth were to fall to zero in 2012, European equities could slump a further 25%.

Nonetheless, writing in a research note, they added: ‘US growth of 2.2% in 2012 should be sufficient for equities to yield low double-digit returns, and the upside is tremendous if US growth returns to the 3.0% level and equities re-rate accordingly.’

‘Low growth for a long time’

James Butterfill, equity strategist at Coutts, does not see developed economies as likely to suffer a double-dip recession, but does expect ‘low growth for a long time’ as policymakers continue to reduce national deficits.

He said today that stock selection in this environment should reflect the attraction of secure dividend yields, competitive advantage, strong balance sheets and business models focused on exporting to emerging markets rather than weak domestic economies.

In terms of UK sectors, Butterfill said he avoided financial stocks ‘purely based on how extreme the sentiment is’ against them, and amid regulatory uncertainty ahead of the Independent Commission on Banking report later this year. And utilities, while seen as attractive due to their defensive nature were not ‘particularly attractively valued’, he said.

But he sees value in the materials sector, which has ‘underperformed exceptionally and sentiment has swung quite out of favour'. Indeed, the FTSE All Share Oil & Gas and Mining indices have lost 16% and 19% respectively in the last two weeks, while the FTSE 100 has given up 12%.

The low-growth environment ‘should benefit the more cyclical stocks over the long-run,’ he said.

‘So the materials sector, the resources stocks, would benefit from that,’ Butterfill added, pointing out that there was ‘a real mixture’ in the sector and that gold stocks were likely to be ‘much more resilient.’

Value traps and outperformance

Dominic Okane, analyst at Liberum, warned that a eurozone default would see commodities collapse and the already cheap miners ‘become a value trap’ as in 2008, when the sector tumbled.

Yet he also noted that there are ‘subtle contrasts’ to 2008. ‘First, leverage is categorically not an issue for the big miners, which is most relevant for Rio (RIO.L), Xstrata (XTA.L) and Glencore (GLEN.L),’ Okane said.

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12 comments so far. Why not have your say?

David Evershed

Aug 10, 2011 at 13:22

It is far too soon to be going back into equities.

I have been in index linked gilts for nine months and plan to stay there until the FTSE bounces off 4000.

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Designerbabe

Aug 10, 2011 at 13:40

When would be a good time to buy then?

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Tony Peterson

Aug 10, 2011 at 13:53

David Evershed.

Not too sure that I agree with you. I too have been heavily into index linked gilts. For about 20 months.

But when I noticed the size of the premium on 1.25% 2017 had grown to 14%, and shares had slumped without good reason, I sold half my IL holding on Monday, and bought back shares in 6 companies I hold where I have taken some profits, and now feel that I can safely buy back at a discount .

If I've made a mistake and equities do another plunge I will sell the remaining linkers and repurchase some more old friends at a discount.

I have made some thousands of tax free profits and and very glad to have been able to boost my income substantially by buying back into defensive companies that I think are safer than the Treasury.

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mark senior

Aug 10, 2011 at 14:42

Tony

I have a similar situation, I have been building up a number of defensives over the last 3 months, linkers, high yield corporates and some absolute return product.

By and large they have done the job well and are effectively around a 10% relative premium to equities.

I'm tempted to sell them and buy into distressed FTSE 100 high yielders.

regards

Mark

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Drake

Aug 10, 2011 at 16:40

Once again, Citywire, a little unlucky with your headline. The FTSE is down 170, back down below 5000. I hope no-one was listening to you (apart from Dumb Investor, who will have filled his boots). Well said, David Evershed, the voice of reason.

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Anthony Tinslay

Aug 10, 2011 at 18:55

On the same page above

"Stock Markets stabilize" and FTSE down 157points" Who is joking whom?

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Confused - Goldshares

Aug 11, 2011 at 08:55

Any advice on best companies dealing in gold shares for investments?

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rich banker

Aug 11, 2011 at 12:56

I have been a buyer of good divi stocks for years as long as they were in the FTSE top 100 or preferably the top 10.

Of course I avoid banks now but my biggest holding by far is HSBC acquired when I worked for Midland as part salary, who have escaped the gov bail-out .

However I always took the divi in recent years since I retired from International Consulting either to diversify or spend.

Property has been a good income earner for me due to my correct long term view on interest rates. As I always bought new and at a discount capital values are not bad. Certainly I was never conned into buying expensive City(Shitty) centre flats at double their real value. But then I learnt how to avoid high pressure sales at a young age having mixed with IBM!

I do regard now as a good buying time BUT only for good divi payers. I buy for the long term and am not a day trader chasing quick capital gains.

I may buy into gold but only if the company physically holds it or mines it.

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Grumpy Old Man

Aug 13, 2011 at 09:52

Have made a few modest purchases mainly for my SIPP,but realise stocks may well go lower.Will keep an eye on things and dip in over the next few months/years!

In the meantime the handsome divis in my trading a/c's are a comfort.

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tony williams

Aug 15, 2011 at 11:36

the mrs sits on a ton of gold-- exageration- but when to sell is her problem any replies would helpme from being nagged about it

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Drake

Aug 15, 2011 at 11:46

Tony - when the UK govt starts buying would be one signal.

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mark senior

Aug 15, 2011 at 11:55

Tony

I would say hold.

One further strategy may be to sell some physical gold and re-invest in gold mining shares/funds

The shares have not re- rated in line with the price of physical gold, of course there is no guarantee that they will do so, but historically they have.

Gold is a play against inflation, it's a preserver of value.

Big debts in EU, UK and USA, Inflation and QE in these countries will be a stimulant for gold.

Although stock market has recovered from its lows, have any of the big issues gone away? unfortunately no!

Logic says buy gold not sell.

I admit to owning physical gold and gold mining funds.

Kind regards

Mark

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