UK shares have been hit hard lately, with fears of a looming recession creating uncertainty in the markets. While larger companies have proven to be more resilient, small- and mid-cap stocks in the FTSE 250 haven’t had as much luck. Consequently, the index has fallen by nearly 15% since the start of 2022.
But is this turmoil actually creating a rare opportunity to buy wonderful companies at a discount? Let’s take a closer look at what exactly is going on. And how I can use this situation to try and maximise my long-term portfolio gains.
Why are UK shares falling?
To keep things from collapsing, stimulus cheques were being pumped into the economy when the pandemic started. As a consequence, inflation has reared its ugly head. And when combined with supply chain disruptions, the adverse effects have been amplified. So much so that UK inflation in April stood at 9%!
To tackle this macro-economic issue, the Bank of England has begun slowly raising interest rates to bring inflation back to its ideal value of around 2%. But with both the value of money depreciating quickly and the cost of debt rising, shopping lists and mortgages are getting much more expensive. Not to mention the additional pressure of skyrocketing energy bills.
That obviously sucks for consumers. And with many families seeking to reduce their spending, the economy has begun to slow. A recession could be inevitable if things get too far out of hand. That means less access to capital and slowing sales performance for businesses. With that in mind, it’s not surprising to see UK shares tumble on these fears. But are they now too cheap?
Investing for the long term
While a recession might be possible, it’s by no means guaranteed. But let’s assume the worst. What would such a situation mean for long-term investors like me?
In my opinion, not much. The British economy has been through recessions countless times and always emerged stronger with a 100% success rate. That’s not to mean there won’t be volatile times ahead. But for the companies with solid balance sheets and proven business models, this is ultimately nothing more than a speed bump.
That’s why I see the recent market decline as an exciting buying opportunity to snatch up some cheap UK shares. As famous investor Warren Buffett says, “be fearful when others are greedy, and greedy when others are fearful”. And it’s also worth noting that the ‘Oracle of Omaha’ has been taking his own advice and spent $51bn (£41bn) buying stocks in the last couple of months.
Given his long track record of success, I’m happy to follow his lead with UK shares. And, subsequently, I’m already going through my watchlist in the pursuit of potential bargains, focusing on the next decade rather than the next couple of months.