2022 is starting out very well for many UK shares. The FTSE 100 index, as I have pointed out a few times before, didn’t just cross 7,500 in January, it has actually managed to stay above that level for multiple sessions as well. And this despite some persistent fears about Omicron, sky-high inflation, and the fact that excess liquidity will dry up soon, quite likely to the stock markets’ detriment.
I think we could see the persistence of all these themes throughout 2022, but also the return of growth. The UK’s economy in particular, is forecast to grow at a pretty robust 4.7%, a much bigger growth rate than for other major European economies like Germany and France. And this in turn, could spillover into UK shares as well. However, I must still be discerning in my assessment because not all stocks are likely to benefit equally.
Best UK shares during high inflation
For instance, I think high inflation could impact stocks that are consumer facing, have limited pricing power, and have also seen a fair bit of recovery already. These include stocks like grocers and non-essential retailers, as examples. However as long as growth is robust, inflation could benefit stocks like oil biggies and banks, which have already been on a roll in the recent past. And with the further expected rise in oil prices and interest rates, the stocks could benefit even more.
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Not only are these stocks likely to see more capital growth, I think their dividends are due for increases as well. Their dividends suffered during the pandemic, and are still not back to pre-Covid-19 levels. Of course if another variant were to rear its head, these stocks would be the first to plunge. But all things considered, I doubt if the virus will spring any catastrophic shocks again.
Best dividend stocks for 2022
As far as dividends go, though, I would not depend on last year’s dividend stars, the multi-commodity miners. The big reason why they saw a huge windfall of profits was on account of government spending to support the economy during the pandemic. However, with public spending now being withdrawn, commodity price forecasts have declined. Even if growth were to remain robust, which would positively impact their fortunes, I am not sure they would be at the same levels as last year.
As a long-term dividend investor, I think I am better off buying FTSE 100 utilities instead. Irrespective of where we are at in the macroeconomic cycle, these stocks are dependable. Demand for utilities suffers less during downturns and as a result they are far less likely to cut dividends during such times. And even during good times, their dividend yields are pretty much consistently above average. The upside for them is never quite as high as that for the miners’ last year, but there is something to be said for consistency.
In sum, for growth I’d buy oil and banking stocks right now. And for dividends, utilities are my pick.
