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As someone who invests primarily in UK shares, I was disappointed by last month’s Budget. Most economists appear to agree that the chancellor’s announcements are likely to leave interest rates higher for longer.
Although the Bank of England (BoE) reduced the base rate by 0.25% (7 November), the government’s decision to borrow another £32bn over the next five years means the pace of future cuts is likely to slow.
Indeed, UK 10-year gilt yields are currently (8 November) 0.4% higher than they were two weeks before the Budget. This benchmark’s used to price mortgages and other loans so it’s a good indicator of future borrowing costs.
This makes me wonder whether I need to change my approach. In a higher interest rate environment, now could be a good time for me to focus on UK stocks with lower levels of borrowings.
To clarify, my definition of debt excludes lease labilities. That’s because there’s usually a corresponding asset on a company’s balance sheet for this type of debt.
Currently, there are three FTSE 100 stocks with no borrowings.
Strong balance sheets
Healthy cash flows have historically helped Persimmon (LSE:PSN) avoid the need to borrow. And with no interest to pay, this means there’s more cash left over for shareholders. In recent years, the housebuilder’s paid out nearly all its profits in dividends.
And when the BoE started to cut interest rates, many thought this would help boost demand for its properties. Indeed, it expects to build 5.8% more homes in 2024 than in 2023. And its order book’s 17% higher than a year ago.
However, I wouldn’t want to invest at the moment. And that’s unfortunate given that I already own shares in the company!
The uncertainty over the future direction of interest rates makes me think that the recovery in the housing market could slow. And I think the government’s decision to reduce the stamp duty threshold for first-time buyers isn’t going to help.
Also, I was concerned when the company said in its trading update on Wednesday (6 November): “We are seeing some signs of build cost inflation beginning to emerge in price negotiations for 2025”.
Unsurprisingly, this sent the company’s shares sharply lower.
Another debt-free company is Rightmove. But as the owner and operator of the UK’s largest property website, it’s also likely to be adversely affected by higher interest rates.
Auto Trader Group‘s the third member of the Footsie with no outstanding loans or overdrafts. However, Budget tax increases will impact on the profitability of car dealers, which could reduce their marketing spend. Also, higher borrowing costs will reduce disposable incomes and leave less headroom for drivers to change their vehicles.
What should I do?
But I haven’t lost confidence in UK shares as I’ve long believed them to be attractively priced compared to, say, those on the other side of the Atlantic.
While I had thought other investors would be attracted by some of the FTSE ‘bargains’ currently on offer, I don’t think the Budget’s helped improve sentiment.
Yet I still see potential. I’m going to consider other stock markets, but I’m also going to focus on UK shares with less exposure to the domestic economy when I’m next in a position to invest.
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