Last week, Governor of the Bank of England Andrew Bailey added his voice to the growing number of commentators voicing positive expectations for the economy. And if he’s right, it’s probably good news for UK shares.
According to Reuters, Bailey said: “I really do think that we are going to see a pronounced recovery in the economy as the vaccination programme, as it is doing now, rolls out.”
Strength in UK shares
I reckon the prospect of pronounced economic recovery makes sense of the strength we’ve been seeing in many share prices lately. The pandemic caused a sharp shock to economic activity that affected many businesses. If the shock reverses, many firms will likely see their prospects improve in the months and years ahead.
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Meanwhile, several themes appear to be playing out in the stock market. For example, I think many investors made a bit of a dash into shares that were depressed by the pandemic. I think that started to happen when the first Covid-19 vaccines received approval. But it’s an ongoing trend that seems to continue with every good piece of vaccine news. For example, when the number tally of those vaccinated increases.
So, we are seeing UK share prices rising in affected sectors such as banking, housebuilding, travel, hospitality and others. But I reckon it’s still a strategy worth me pursuing. In fact, I’m expecting to invest in the theme for years to come. So, I’d aim to buy shares in companies such as banking giant Barclays, and insurance company Aviva. I also like the look of consulting, projects and operations solutions provider John Wood and integrated producer broadcaster ITV.
Another general theme is the apparent abandonment of some steady, cash-generating companies with defensive businesses. It looks like investors might have been selling shares in some of those great companies to fund their investments in beaten-down cyclical outfits.
Diversification
At least, that’s my theory! But whatever the reason, some of my favourite defensive stocks look like better value right now than they were just a few weeks and months ago. For example, I’m keen on fast-moving consumer goods firm Unilever, water company Severn Trent, and pharmaceutical big-cap GlaxoSmithKline.
But as with any strategy for investment, we can never be certain about what will actually happen. My own theories could be wrong and share prices can move lower as well as higher in the future. But all stock market investing involves an element of risk to my capital. In some ways, my acceptance of the risk is the price I have to pay before being exposed to the potential gains shares can deliver.
One way of aiming to mitigate the risks from shares is to diversify my invested capital between different stocks. In that way, I can invest in several underlying businesses from different sectors and spread my risk so that I’m exposed to different factors.
