Selecting UK shares to buy in the current economic and political climate is pretty tricky. There are plenty of FTSE 100 companies on the London market that I would like to own. Unfortunately, many of these are currently exposed to significant risks and challenges, which could have an impact on their growth in the year ahead.
There are many factors we need to consider before investing in a company, including the general economic environment.
Challenges for UK shares
For example, right now, inflationary pressures are building around the world. These are pushing up the cost of goods for companies and they may not be able to pass these higher charges onto consumers. If they cannot, they will have to absorb the rising costs in their bottom line.
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Inflationary pressures are also forcing central banks to start increasing interest rates. This will increase the cost of debt for many corporations and could be another factor that influences profit margins in the years ahead.
Considering these challenges, I am looking for UK shares that exhibit two key qualities. They must have large profit margins with the potential to absorb rising costs. And they also need strong balance sheets so rising interest rates will not present too much of a headwind.
FTSE 100 consumer champion
A company that currently exhibits both of these qualities is Reckitt (LSE: RKT). The global consumer goods group owns a stable of brands in the hygiene and health sectors. Individually, these brands are strong businesses, but they are even stronger when combined.
The brand strength of these products also enables the business to charge above-market prices. Ultimately, this helps the business generate fatter profit margins.
But margins have collapsed in the past two years as the company has announced large write-offs. However, in the four years between 2015 and 2018, it produced an average operating profit margin of 25%.
On top of this positive quality, the group also has a robust balance sheet with the potential to absorb higher interest rates.
Investing for growth
These qualities do not make the business immune from the risks outlined above, but they do provide a level of protection. Profits could come under pressure from rising costs in the years ahead, and this is something I will be factoring into my projections.
Even after taking this headwind into account, I believe Reckitt is one of the best UK shares to buy now for my portfolio. Management has outlined plans to spend more than £1bn a year over the next few years developing new products. This initiative will help contribute to growth and is another reason why I think the enterprise will outperform over the next couple of years.
Historically, infrastructure assets have outperformed during periods of rising prices and inflation. These assets are perfectly suited to an inflationary environment. While they may cost a lot to build, their value will increase in line with rising prices in the long term as they will cost more to replace. What’s more, any revenue streams tied to these assets are usually linked to inflation.
Infrastructure stocks to buy
Considering these factors, 3I (LSE: III) no is one of my no-brainer FTSE 100 shares to buy now. This enterprise is one of a handful of UK shares with exposure to infrastructure assets. It owns and manages a portfolio of infrastructure funds and private businesses.
Over the past couple of years, this diverse portfolio has enabled the group to benefit from rising asset values in the private equity industry and the booming infrastructure market.
Unfortunately, this is not the perfect business. The company does have a high level of debt, which could become problematic if interest rates rise. This is probably the biggest challenge it will face in the years ahead. Finding funding to finance new deals will also become a challenge if interest rates rise significantly.
FTSE 100 value creation
Despite these headwinds, I would buy the shares for my portfolio. 3I has a strong track record of building value for shareholders. It has also spent over a decade developing the connections required to gain access to the most lucrative deals. This is an advantage not necessarily displayed in the company’s share price. Without this competitive advantage, other corporations may struggle to build exposure in the industry.
Commodity prices tend to rise in lockstep with inflation in the long run. As such, I think buying a commodity-focused business is the right decision in the current environment. There are a number of options in the FTSE 100, but my favourite is Glencore (LSE: GLEN).
As there are plenty of reasons not to own this business, I will start with the negatives. The group has a lot of exposure to the coal industry, which could lump it with significant environmental liabilities. Its business model also requires a lot of debt, which could become an issue as rates rise.
Glencore has also been the subject of several serious corruption allegations. These could hurt the firm’s ability to do business in several regions.
Significant tailwinds
But I think the company’s positives offset these negatives. This year, the coal price has jumped as countries clamour to generate enough energy to keep the lights on. It does not look as if this trend will change anytime soon, suggesting Glencore has made the right decision, for now.
The company is also the world’s largest commodity trader. This requires a lot of leverage and vast economies of scale to work successfully. The business has the resources available to it to attack this market. Many other firms just do not have the scale or resources to compete successfully.
These qualities are (and will remain) huge competitive advantages as the economy returns the growth. The demand for essential commodities is surging, and Glencore can meet this demand. If resource prices rise in line with inflation over the next few years, the group’s profits should follow suit.
Considering these tailwinds, I think the stock is worthy of a place in my portfolio of no-brainer FTSE 100 shares.
