How to pick up an investment bargain by buying UK shares

A no-go zone or a land of opportunity? That’s the question that investors are asking themselves this weekend about the UK.

Is this the moment to be greedy when others are fearful, viewing Britain as a bargain bet, even against the background of chaos in government bond markets? The upward surge in bond yields, driven by mounting doubts over the Government’s economic stewardship, has diminished the likelihood of interest rate cuts in coming months.

Many investors have already been voting with their feet. A net £9.6billion was pulled from UK funds in 2024.

Behind this exodus lies apprehension that British companies’ profits will be squeezed by the higher minimum wage and National Insurance increases.

In past days, Marks & Spencer and Next have been among the retailers citing the adverse impact of these Budget 2024 measures.

British companies are perceived to be cheap, since they are trading at an average of about 12.6 times their profits, against as much as 24.2 times in the US.

Putting money into the market at this level makes sense since, as Dan Boardman-Weston, chief executive of BRI Wealth Management reminds us, ‘the price that you pay for an investment is the most important determinant of longer-term returns’.

This perception that bargains abound could bring a repeat of the merger mania of 2024. Close to 20 companies in the FTSE 250 were the subject of bids.

Stuart Widdowson, co-manager of the Odyssean investment trust, which specialises in smaller companies, says: ‘We believe that UK shares – particularly those in smaller companies – remain unloved.’ An improvement in sentiment could reverse the fortunes of these shares. But in the absence of such a shift, Widdowson argues that UK companies will remain ‘on sale’, with more overseas takeover approaches appearing.

In the longer-term interest of our economy, the Government should, of course, be taking steps to arrest the shrinking of our stock markets, including abolishing the stamp duty payable on share dealing – there is no such levy in the US.

But while waiting for Chancellor Rachel Reeves to introduce reforms, here are the ways to go bargain shopping in the UK markets.

BIG NAME STOCKS

Dismay over current government policy may be deterring you from taking a stake in UK plc. But, as Jack Roberts, analyst at asset manager IBOSS oints out, British companies are not just local players – they are industry leaders with substantial global exposure.

He says: ‘FTSE 100 companies derive 74 per cent of their revenues from overseas, while the more domestically-focused FTSE 250 companies generate around 51pc of their sales internationally.’

Amid the emphasis on the Budget tax rises and apprehension over a global trade war triggered by President-elect Donald Trump’s potential tariffs, Imran Sattar, manager of the Edinburgh investment trust which has stakes in Shell, Tesco, Dunelm, Rightmove and NatWest, says that these businesses have made ‘excellent strategic, operational, and financial progress’ in the past two years.

Aerospace giant Rolls-Royce was another star of 2024 with shares soaring nearly 90pc last year to 582p, propelled by its recovery from the pandemic.

If you want exposure to the whole range of UK plc, Fidelity Special Situation and Liontrust UK Growth are rated best buy funds by three or more of the investment platforms. Check the online factsheets of trusts like City of London, Law Debenture and Merchants to see if they invest in businesses that you do not hold directly or through other funds and trusts.

BRITISH TECH

The focus on the Silicon Valley’s tech titans means that hugely innovative British businesses in the sector can be overlooked.

But Bank of America has picked the London Stock Exchange Group as one of its 25 stocks for 2025, seeing more demand for the company’s analytics and data services. The price of the £60.58billion FTSE 100 business rose by 30 per cent last year to 11,622p – but Bank of America has raised its target to 13,000p.

The Augmentum Fintech trust represents a larger gamble on UK tech because its shares stand at a 37 per cent discount to its net asset value, although it backs challenger banks like Tide and Zopa.

The trust’s boss Tim Levene argues that there is ‘significant disconnect’ between revenue growth at the trust’s investments and its share price.

SMALLER COMPANIES

Venturing into smaller companies involves a high element of jeopardy at any time. But it could be a potentially rewarding experience at this nerve-jangling period.

The share price of the Odyssean trust stands at a negligible discount of just 0.38 per cent to its net asset value – suggesting that a conviction in some quarters that micro-cap stocks could provide a few thrills. Rockwood Strategic is at a discount of just 1 per cent.

It seems as if some investors reckon that these businesses could catch the eye of a takeover suitor or thrive to become the companies that provide growth and are the source of new jobs.

Backing Britain may take considerable nerve right now. However, I am not fleeing these markets – mindful of the hazards, but also hopeful for some excitement.