UK stocks are well represented in my portfolio. A key reasons for this is valuations. Many sectors in the UK have been trading at discounts for some time. This allows me to benefit from sizeable dividend yields and the prospect of share price gains when sentiment improves.
Over the past year, we’ve seen plenty of volatility. Resource stocks have surged while many other sectors have suffered. This week, we appear to have entered a new pocket of volatility. Investors are looking carefully at central bank signals and earnings reports.
These opportunities don’t come around all that often — maybe just a few times a year. So, amid this backdrop, where am I putting my money?
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UK economic challenges
The FTSE 100 might have closed at its highest-ever level, above 7,900, but that’s largely due to surging resource stocks. Looking over 12 months and three years, we can observe that many sectors are trading at discounts.
Despite recent surges, one area of interest in banking. Barclays (LSE:BARC) remains 6% lower over the course of 12 months. A downturn this week is probably reflective of the new forecast that suggests the UK will be the only G7 nation to experience a recession in 2023.
Banks typically perform well when the economy is strong and poorly when it’s weak. But there are several reasons why I’m taking this dip as an opportunity to buy more Barclays stock.
Firstly, a discounted cash flow calculation suggests that Barclays could be undervalued by 70%. That’s based on predicted cash flow, which can be difficult to forecast over 10 years. But it is positive.
Secondly, I don’t perceive the near-term environment to be that negative. Higher interest rates are a major reason for this. Some analysts predict that higher rates could lead to an interest rate tailwind of £5bn in incremental revenue for Barclays by 2025.
Buying trends
When the stock market collectively moves in one direction, I look at my shortlist of companies I see benefitting from long-term trends. One of those trends is the green agenda.
Near-term challenges concerning the UK’s economy and disposable income are unlikely to have a profound impact on the renewable energy sector. In fact, if anything, I hope they’ll encourage the government to loosen regulations around the sector. Most notably a moratorium on onshore wind farms might end. Onshore wind can be twice as cost-efficient as offshore wind.
Moreover, the green transition is now worth £71bn and has brought jobs and investment to parts of the UK experiencing industrial decline, according to the CBI.
As such, I’m buying more Greencoat UK Wind (LSE:UKW). The trust is well run, offers an attractive 4.8% dividend yield, which increases in line with inflation, and exposure to a very exciting part of the market.
Currently, it’s trading at an 8% discount versus its net asset value (NAV) — which was only updated last month — after a dip this week. As a note, Greencoat said the NAV was calculated using energy prices from Q2, and not Q3 when prices spiked.
Wind can be temperamental, that’s for sure. But broadly I’m excited by the sector and like the stability Greencoat offers.
