Volatility in UK shares seems to be creeping back into the stock market. After delivering a solid rally since October, the FTSE 100 is seemingly in a nose dive again.
Following the implosion of three US banks last week, British banking stocks appear to be the target of panic. And Barclays, Lloyds, Natwest and others have all been dropping like stones in the last five days.
Investors are understandably concerned about contagion. Yet there is currently no evidence of this. The failures of the three relatively small American banks all originated from idiosyncratic reasons.
In other words, rising interest rates may have been the trigger, but it wasn’t the cause. That lies squarely on a lack of risk management allowed to fester due to lower regulatory oversight compared to the largest financial institutions in the US, UK, and Europe.
In other words, investor fears may be unjustified. And capitalising on this recent volatility could pave the way for superior returns in the long run.
Fear takes no prisoners
Banking stocks seem to be the primary target of recent sell-offs. But panic doesn’t discriminate. And many FTSE 100 businesses across other industries have been caught in the crossfire.
| Company | Industry | 7-Day Performance |
|---|---|---|
| Prudential | Life Insurance | -19.03% |
| Standard Chartered | Banks | -17.01% |
| Barclays | Banks | -15.41% |
| Ashtead | Industrials | -13.34% |
| Glencore | Mining | -12.97% |
| International Consolidated Airlines | Travel & Leisure | -12.86% |
| Legal & General | Life Insurance | -12.61% |
| BP | Oil & Gas | -12.60% |
| Airtel Africa | Telecommunications | -12.51% |
| Beazley | Non-life Insurance | -12.21% |
Does this mean investors should blindly buy UK shares that have fallen from grace? Of course not. Emotions might be driving investment decisions this week, but every business still needs to be evaluated before committing to an investment.
After all, the last thing an investor wants to own is a flawed enterprise likely to continue its downward momentum.
Finding the best UK shares
With interest rates on the rise, the importance of positive free cash flow is following suit. With debt becoming more expensive and equity in the toilet, financially self-reliant firms stand a far greater chance of success.
Moreover, businesses generating excess cash may have far greater flexibility than their competitors. And, historically, that’s led to securing more market share, or taking out the competition with an acquisition.
Another factor to consider is the state of existing debt. A balance sheet with many loan obligations is often considered a bad trait. But that’s not always the case. Don’t forget debt is a powerful tool when used correctly.
UK shares with billions of pounds worth of liabilities may still be healthy if the underlying business generates sufficient cash flow to service them. But with interest rates rising, it’s crucial to investigate whether loans are fixed or variable. Margins could face some pressure in the coming months if it’s the latter.
Time to buy?
Famous investor Nathan Rothschild once said: “The time to buy is when there’s blood in the streets”. That certainly seems to be an apt description of the current state of the stock market. And buying UK shares today could be a lucrative decision in the long run.
However, the irrational decisions that fearful individuals make create risk. It’s impossible to say whether the market will continue to decline in the coming weeks, or months, or resume its recovery. That’s why employing a pound cost-averaging strategy may be the best approach to capitalising on bargain shares today.
