The London Stock Exchange offers investment opportunities in the face of recession, inflation and rising interest rates. These are only a problem for companies that will refinance in the coming months. Interesting SME valuations, solid balance sheets and dividend coverage.
Equities across the Channel have two sides of the same coin, with investors ready to take advantage of the opportunities offered by international companies – despite inflation and high interest rates – because they are less damaged by Brexit. On the contrary, they have neglected the most active businesses locally, penalized by the drop in consumption. Overall, the London exchange in 2022 was the most resilient among many other global stock exchanges. In this context, banks and oil majors, for example, have been the protagonists: they have increased dividends and repurchased massive volumes of shares thanks to the appreciation of commodities and the increase in rates, resulting in a strong growth in their profits .
Affordable Valuations For Local SMEs
British small and mid-cap stocks are attracting interest precisely because they have had a not so good year. The price paid, noted Sue Noffke, head of UK Equities at Schroders, is one of the primary factors determining long-term investment returns, and the current yield of around 3% offered by the FTSE 250 – the most established group of UK listed PMI – showing incorrect valuations. Some of these SMEs are focused on the domestic market, in particular they seem to be pricing in a variety of negative news. However, although we are far from the climate of confidence that reigned at the beginning of 2022, the expert recalls that it is precisely during the most complex periods that opportunities increase.
Knowing How to Choose Between Companies
But what are the opportunities on the Stock Exchange today? Investing in SMEs can be very profitable over the long term and today this strong growth potential is offered at a very attractive price. Noffke argues, seeing opportunities both in home businesses serving UK consumers and businesses, and in the many SMEs operating globally. In this case, however, valuations are very high and the market does not seem to distinguish between good and less good companies. While on the domestic front we have to deal with the flare of inflation, the effects of which are amplified by the strengthening of the dollar, which fuels concerns about the performance of the domestic, European and even global economies.
The increase in interest rates, a problem only for those who have to refinance themselves
Ultimately, the effects of rate hikes could turn out to be less perverse than feared. It certainly could be a major problem for companies with high levels of debt, especially if it needs to be refinanced in the next 12 months. However, she estimates, many of the best companies have weathered the pandemic and are now well prepared to face the storm ahead with the support of strong balance sheets. The doubts, on the other hand, concern the reactions of consumers and businesses to the recession, of the labor market, and recourse to accumulated savings. Overall, according to Noffke, given the very gloomy situation we are in today, it may not take much to lift sentiment and valuations.
Dividend Coverage is Solid
Conversely, if the situation worsens than expected, the dividend hedge for UK equities is now stronger than it has been in a decade, well over twice (even for regarding the FTSE 250 index). As a ratio of a market’s earnings to the dividends paid by the company, hedging indicates the margin of safety for maintaining dividends in the event that earnings are reduced more than expected during the recession. It is, he underlines again, another important measure of financial resilience that at Schroders they carefully evaluate together with the strength of the balance sheets.
This article is originally published on fondionline.it