The rotation into UK stocks is about more than investors becoming risk averse. The value stocks that are listed on the London Stock Exchange are seen as one of the best sectors to invest in to protect against inflation. The below stock picks have been identified using fundamental and technical analysis techniques, which point to them being the best UK stocks to invest in now.
UK Stock Performance
On a long-term timeframe, UK stocks have underperformed most other benchmarks, especially those containing sometimes more glamorous growth stocks. Since the lows of 2009, the FTSE 100 has increased in value by 113%, but the Nasdaq 100 has over the same time increased in value by 984%. Zoom in to more recent trading history and there is a sign that the trend has turned. Between the start of January and the end of May 2022, the Nasdaq 100 decreased in value by 14.75%, whereas the FTSE 100 traded in positive territory and put on 2.98% in value.
Nasdaq 100 Index – Daily Price Chart – 2018-2022 – Bear Market
FTSE 100 Index – Daily Price Chart – 2018-2022 – Price Support
The paradigm shift in investor attitude brought on by rising interest rates has been good news for LSE-listed stocks as a whole. However, digging into the details and picking the best-performing stocks in the FTSE opens the door to even greater returns.
Why Buy UK Stocks Now?
Fundamental analysis throws up several good reasons to buy UK stocks now. Banking, commodity and oil stocks, which make up a large part of the London stock market, are seen as being stocks to buy to beat inflation. Some of the value stocks on the exchange, such as the big UK supermarket stocks, also tend to see demand levels hold up despite price rises cutting into consumer disposable income.
Forex market trends and the unique make-up of some of the multinationals that are based in the UK are another draw. For historical reasons, some of the bigger UK corporations generate a large percentage of their income overseas. If the pound falls in value, as it has been doing since 2007, then the revenue that those companies generate in currencies other than the pound is inflated when passed back to the London headquarters and converted into GBP.
GBPUSD – Monthly Price Chart – 2007-2022 – Long-Term Decline
Technical analysis adds a third reason why UK stocks are being seen as a top pick right now. The index is approaching a key long-term resistance level – it’s all-time high. That high-water mark for the index is 7,799, which was recorded in May 2018. If, or probably more accurately when, the index breaks through that psychologically important price barrier, there would be few technical analysis resistance levels in the way of further upward price movement.
Spotting a new trend and trading with it is the secret to successful investing, which means that now is the time to apply breakout-based trading strategies to capture the potential of UK stock investing.
FTSE 100 Index – Monthly Price Chart – 1994-2022 – Approaching All-Time Highs
Not only is the UK stock market one of the most trusted in the world, but also the high volumes of trading activity mean that commissions are low and bid offer spreads are tight. This means that investors can enjoy cost-effective trading while gaining exposure to an increasingly popular market. The stocks in the FTSE offer exposure to a wide range of sectors and the best UK stocks to buy now include small and large cap firms, meaning that there is a target stock for every type of investor.
Best UK Stocks to Buy Now
1. SHELL PLC (SHEL)
Oil and gas producer Shell PLC looks set to continue benefiting from the seemingly never-ending bull market in energy commodities. Harmony among the members of OPEC has allowed them to set global production at levels that optimise their returns. At the same time, the conflict in Ukraine now appears to be a situation that will take months rather than weeks to resolve, which continues to limit the potential supply of gas and oil from Russia alleviating the price rises.
Shell PLC – Daily Price Chart – 2018-2022
In Q1 2022, Shell announced that it had posted earnings of $9.1bn, which is the company’s best performance since 2008. A lot of that cash is being returned to investors, which will generate a strong base level of support for the stock. The stock currently offers a dividend yield of 3.35%, and there is also a $4.5bn share buyback programme to factor in.
Shell PLC – Fundamentals
The Shell share price could ultimately come unstuck if it doesn’t manage to convert its core business processes from being carbon to renewable energy based. However, this is currently priced in, and the eye-watering income streams that the firm is currently generating put it in the best possible position to successfully put through the required restructuring.
2. Rio Tinto PLC (RIO)
Multinational mining firm Rio Tinto is well positioned to benefit from how commodities provide a hedge against inflation. The mineral resources that the firm holds tend to keep up with price rises, like a ton of copper is a ton of copper regardless of what is happening in the financial system. As long as its products are still being bought, the firm is relatively immune to whether the unit price for its products is $10, $100 or $1,000.
Rio Tinto PLC – Daily Price Chart – 2018-2022
The good news for Rio Tinto shareholders is that demand for the copper and iron ore that the firm produces looks set to hold up regardless of how long the current inflationary bubble lasts. The restructuring of global transport infrastructure and a move towards using cleaner energy is a government-backed programme that can be expected to take decades to complete.
Building those new windfarms, EV charging facilities and other green energy projects will all require the materials that Rio Tinto produces and ships to its global client base. The strong position that Rio Tinto holds in terms of the ‘new economy’ is bolstered by the firm holding significant lithium reserves, making it one of the best lithium stocks to buy now.
One demonstration of the health of the sector and Rio Tinto’s balance sheet is the impressive 9.41% dividend yield that RIO stock currently offers. That alone is more than current inflation rates and makes the stock and its 6.14% P/E ratio irresistible right now.
Rio Tinto PLC – Fundamentals
One notable fan of Rio Tinto stock is Mad Money’s, Jim Cramer. He’s currently one of a group of high-profile investors who see the current pullback in stocks as a chance to buy the dips, and Rio Tinto is one of his favourite targets.
“I like Rio Tinto. Buy, buy, buy. It’s minerals. Remember, there’s a bull market in minerals, and I embrace it.”
Source: Jim Cramer
3. Ferguson PLC (WOS)
UK-based Ferguson PLC distributes plumbing and heating products and has a strong position in the North American market. The international sales that the firm makes mean that it’s well positioned to benefit from any further weakness in the GBPUSD and GBPCAD exchange rate.
Ferguson PLC – Daily Price Chart – 2018-2022
The firm’s status as a top pick isn’t down to currency moves alone. The quarterly earnings report for business up to 31st January 2022 included stellar sales figures. On a year-on-year basis, net sales were up by 31% and operating profit up by 74%.
Strong business fundamentals have allowed Ferguson to increase the dividend paid to investors by 15% and the multi-million-pound share buyback programme will carry on through 2022.
Ferguson PLC has a market cap of £24.5bn, which puts it in a different size bracket from Shell and Rio Tinto. Those huge multinationals do have enough critical mass to offer investors security, but as demonstrated by the recent sales figures, Ferguson has more potential to continue expanding its business.
Ferguson PLC – Daily Price Chart – 2020-2022 – Fib Retracement
The recent pullback in the Ferguson stock price looks like a period of price consolidation rather than a full-blown trend reversal. Any periods when price trades in the region of the 50% Fibonacci retracement, which sits at 8,543, can therefore be seen as opportunities to get into one of the best UK stocks to buy now. Speaking on the outlook for the firm, Kevin Murphy, group chief executive, said:
“Markets remain supportive and we anticipate solid revenue growth in the second half as we begin to lap tougher comparatives. We continue to be mindful that first half tailwinds on gross margin will likely moderate but we are confident in our full year expectations.”
Source: Ferguson PLC
4. J Sainsbury PLC (SBRY)
Value stocks are seen as an ideal way of investing in a way that protects against inflation. A household name and grocer, J Sainsbury PLC fits the bill not only because it is one of the UK’s largest retailers but also because its P/E ratio is currently 13.8, whereas the average for the UK supermarket sector is 19.6.
J Sainsbury PLC – Daily Price Chart – 2018-2022
The reason why Sainsbury’s is relatively cheap is a sell-off from investors who are concerned that the retailer could lose market share to discounters. Not only does that risk look like it is already priced in, but also Sainsbury’s has been posting some impressive sales growth figures. Since 2015, the grocer has managed to grow sales at 4% per year and it has also increased its dividend yield to 3.9%. The buyout of Argos and Habitat reflects the firm’s willingness to diversify into other business lines and that should help the firm continue to be one of the best UK stocks to buy.
J Sainsbury PLC – Fundamentals
5. Barclays Bank PLC (BARC)
Barclays Bank shareholders can feel hard done by that the BARC share price got caught up in the 2022 sell-off. Banks are typically expected to outperform in high-interest-rate environments due to the margins between saving and borrowing rates widening. Also, the problems facing the economy do not boil down to instability in the global financial system.
At current prices, Barclays appears to be undervalued. A bounce in the BARC share price would represent capital gains, but while waiting for that to happen, those who buy in at current levels will benefit from a 3.34% dividend yield.
Barclays Bank PLC – Daily Price Chart – 2018-2022
From a technical perspective, the share price is reaching the end of a sideways wedge pattern. With time running out, price can be expected to break one way or the other and our analysis favours a pop to the upside. From then on, there would be plenty of headroom for the share price and a chance for the stock to build serious momentum.
Barclays Bank PLC – Fundamentals
The profiles of many of the stocks listed in the UK suit the current investment environment. The global economy is undergoing a paradigm shift and is moving from a low-inflation, low-interest-rate environment into one of rising prices and bank rates. This means that investors need to recalibrate their analysis to ensure that they make the most of the new trend.
Scaling back on risk-return can be a good move in a high-inflation economy. The valuation techniques used to price stocks can be thrown out by analysts not being sure if inflation in six or 12 months will be 5% or 15%. As estimates of share price valuations diverge, stock price volatility picks up. The best UK stocks to buy now have been selected on their merits, and also because even as volatility picks up, they should offer fewer of the dramatic price swings that can force investors out of positions.
Whether you’re an experienced investor looking to rotate into new strategies, or a first-time trader attracted to the idea of picking up stocks at bargain prices, the UK stock market will have something for you. Navigate to this shortlist of trusted brokers to set up a platform that provides the research and easy-to-use functionality to help you make a profitable stock pick and be able to monitor its progress with ease.