Obviously, the economy is a mess. In the UK, we’re in the third lockdown within the last year. Not only has the past year taken a toll on human life, it has also been a big setback for business. This of course, has implications for UK shares because investors are reacting to macro news.
Dismal economic scenario
So when dismal news on the economy coincides with weakness in the FTSE 100 index over the past two weeks, it’s hardly a surprise. British households are holding back their expenditure, the proportion of workers on furlough has risen to the highest point since July, and public debt is ballooning, reports Reuters.
The future’s also somewhat uncertain. Economists expect the UK economy to contract in the first quarter. The International Monetary Fund has also slashed its forecasts for the UK for 2021 by a whole 1.4 percentage points.
Reasons for cheer
But while these are big challenges to contend with, I think there are a number of positives to consider too. Despite a growth forecast cut for 2021, the UK is still expected to grow by 4.5%. By 2022, growth is expected to rise to 5%.
I think this in itself is a good place to start. Additionally, we could soon start seeing proof of activity picking up as the lockdown comes to an end with vaccinations well underway. Many FTSE 100 companies are globalised, which means that even higher growth elsewhere is good news for these UK shares and the index.
Choosing a UK share to buy
With this as the context, I’m most inclined to buy FTSE 100 shares that meet two criteria:
- Their share price should have potential to rise further. A lot of shares’ prices have run up in the stock market rally that started in November, even though they are financially weak. My sense is that their return to financial health, as the economy normalises, is already baked into the current share price.
- Their future should look relatively secure. While there is vulnerability in the current environment, there are some companies doing relatively well.
Diageo’s one to watch
One such stock for me is the FTSE 100 alcohol producer Diageo (LSE: DGE). It just reported organic net sales growth for the half-year ending 31 December 2020, though its reported sales are down. Nevertheless, organic sales numbers are important, because the increase happened despite the lockdowns and closure of pubs and restaurants. The company has also increased its dividend payout.
Moreover, it has an eye towards the long-term future. The drinks industry, like others industries such as retail, tobacco, automotive, and oil, is seeing big changes in trends as demand for non-alcoholic drinks rises.
There are some risks to buying the stock, however. Its share price has run up quite a bit since November, and its earnings ratio is 49 times. I can think of safer stocks with lower ratios, like Unilever, with a ratio of 17 times.
Still, it’s below the all-time-highs seen in 2019. And if things keep getting better, which is more likely than not, I think DGE should be a winner.
