There are a lot of UK shares that I could choose to invest in. In fact, there are almost 2,000 public companies listed on the London Stock Exchange! Now, not all of these are within my remit to invest in. For example, I don’t want to buy shares in very small companies, or those that operate in some obscure industry. This limits my focus, but still gives me hundreds of potentially cheap UK shares that warrant a further look. From my viewpoint, the below areas are where I’d put a £1,000 investment to work right now.
Finance
Investing in banks and other financial institutions fell out of favour last year. For major banks, the regulator urged a cutting of dividends in order to help cash flow. This meant that income investors couldn’t find much benefit in investing in the likes of Lloyds Banking Group and HSBC.
Further, falling interest rates and the potential for high levels of bad debt meant that quarterly updates painted a sad picture for many. As a result, the share prices of several top banks fell significantly. Although most have started to rally, I still think the sector offers cheap UK shares for me to buy now.
There are still bad debts and historically low interest rates crimping banks’ ability to make big profits. But I think the outlook for the industry is better now that we are in 2021. Bad debt provisions have been easing as the actual-versus-forecast figures are better than expected. I also think we will see higher credit card spending, mortgage applications and other revenues streams pick up into the summer.
Utilities
I think some of the utility companies are UK shares that could act as protection against another stock market crash.
For example, companies like Severn Trent, National Grid and United Utilities all operate in an area that should see demand remain resilient whatever the economy does. So although I could make an argument that the shares don’t look outright bargains in the current environment, they do look ‘cheap’ if I want to hedge against the risk of a crash in my overall portfolio.
Another element of the utilities sector is generally that a good dividend yield is on offer. The three companies mentioned above all have dividend yields above 4% currently. This adds to any performance I might get from potential share price appreciation.
The risk with buying in this area is that the opportunity cost is high. These are established companies, not early-stage high-growth stocks. So if we don’t see a recession, I’m likely going to get better performance from buying growth stocks. However, I do think the dividend element helps to offset some of this opportunity cost.
Subjective cheap UK shares
The above two sectors offer a good value place to park £1,000 in my opinion. However, I acknowledge that what looks cheap to me won’t look the same to someone else! But by doing research, having a conviction that there are some cheap UK shares out there is enough to start investing.