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The volatility of UK stocks appears to be returning to the stock market. After offering a solid rally since October, the FTSE 100 apparently it’s in a tailspin again.
following the implosion of three US banks In the past week, British bank stocks appear to have been in a panic. AND barclays, lloyds, Northwest and others have been dropping like stones in the last five days.
Investors are understandably worried about contagion. However, there is currently no evidence for this. The failures of the three relatively small US banks arose for idiosyncratic reasons.
In other words, the rise in interest rates may have been the trigger, but not the cause. That is directly due to a lack of risk management which can be compounded by less regulatory oversight compared to the largest financial institutions in the US, UK and Europe.
In other words, investors’ fears may be unwarranted. And capitalizing on this recent volatility could pave the way for longer-term outperformance.
Fear takes no prisoners
Bank stocks seem to be the main target of the recent sell-off. But panic does not discriminate. And many FTSE 100 companies from other industries have been caught in the crossfire.
| Company | Industry | 7 day yield |
|---|---|---|
| Prudential | Life insurance | -19.03% |
| standard charter | Banks | -17.01% |
| barclays | Banks | -15.41% |
| ashtead | industrial stocks | -13.34% |
| glencore | Mining | -12.97% |
| Consolidated international airlines | Travel and Leisure | -12.86% |
| legal and general | Life insurance | -12.61% |
| PA | oil gas | -12.60% |
| Airtel Africa | telecommunications | -12.51% |
| beazley | non life insurance | -12.21% |
Does this mean that investors should blindly buy UK stocks that have fallen out of favour? Of course not. Emotions may be driving investment decisions this week, but every business still needs to be evaluated before committing to an investment.
After all, the last thing an investor wants to own is a failing company that is likely to continue its downward momentum.
Finding the best UK stocks
With interest rates rising, the importance of positive free cash flow follows suit. With debt becoming more expensive and equity down the toilet, financially self-sufficient businesses have a much better chance of success.
Also, companies that generate excess cash may have much greater flexibility than their competitors. And, historically, that has led to either securing a larger market share or eliminating competition with an acquisition.
Another factor to consider is the status of existing debt. A balance sheet with many loan obligations is often considered a bad trait. But that is not always the case. Don’t forget that debt is a powerful tool when used correctly.
UK stocks with billions of pounds worth of liabilities may remain healthy if the underlying business generates enough cash flow to service them. But with interest rates rising, it’s crucial to investigate whether the loans are fixed or variable. Margins could face some pressure in the coming months if the latter.
Time to buy?
The famous investor Nathan Rothschild once said: “The time to buy is when there is blood in the streets”. That certainly seems like an apt description of the current state of the stock market. And buying UK shares today could be a lucrative decision in the long run.
However, the irrational decisions that fearful people make create risks. It is impossible to say if the market will continue to fall in the coming weeks or months, or if it will resume its recovery. That’s why employing a pound cost averaging strategy may be the best approach to capitalizing on bargain stocks today.
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