UK stocks have been struggling lately. The FTSE 100 is down 4% since the start of the year and the FTSE 250 has fallen by 22%.
A drop in share prices can sometimes generate attractive investment opportunities. But are they about to recover, or do they have further to fall?
In general, I don’t base investment decisions on what the stock market is about to do. Nonetheless, I do think that it’s important to have an idea about the general outlook for British shares.
My view is that UK stocks still have further to go. I think that the pressure from inflation that has been weighing on share prices isn’t likely to let up in the near future.
Inflation
British shares have been falling because the Bank of England has been raising interest rates. As interest rates go up, saving money (rather than investing it) becomes more attractive and share prices come down.
Interest rates have been going up in order to try and bring inflation under control. The Bank’s target rate of inflation is around 2%.
The most recent Consumer Price Index (CPI) reading in the UK was 122.5 in July. That means that prices are 10.1% higher than they were a year ago, when the number was 111.3.
Back in December, the CPI was at 115.1. That means that even if there’s no more inflation at all in 2022, inflation will still be at 6.4% at the end of the year.
Given that it’s aiming for 2% inflation, I can’t see the Bank of England leaving interest rates where they are with inflation above 6%. That means that I think interest rates have further to rise.
As a result, I think that UK stocks have further to come down. I don’t expect the recent rally in UK share prices to prove sustainable.
What I’m doing
Given that I’m expecting British shares to fall, what do I plan to do? Put simply, I plan on doing what I always do, which is trying to buy shares in quality companies when they trade at attractive prices.
At the moment, I have investments in two UK stocks. The first is Experian and the second is Halma.
Experian shares currently trade at a level higher than I’d like to buy them at. The share price is currently around £25.80 and I’m looking for closer to £23.
A further decline in the price of British shares might give me another chance to buy Experian stock at attractive prices, though. So I’m keeping a close eye on things and making sure I’m ready to take an opportunity if one arises.
By contrast, I think that the Halma share price is attractive right now. As I write, its shares trade at £20.16 and I’m looking to buy this stock anywhere under £20.Â
If UK stocks sell off further, I’ll see that as an opportunity to buy more shares at even more attractive prices. So while I have a bearish outlook, I think this could be a great opportunity for me to buy British!