I’m looking for stocks to buy for my portfolio in order to invest in the stock market recovery. As the UK economy moves on from the coronavirus crisis, I think some businesses will quickly recover, although this is not guaranteed. As such, I’m focusing on blue-chip UK shares for this strategy.
By concentrating on these businesses, I can minimise my risk of losses if the recovery doesn’t materialise while maximising potential upside in the best-case scenario. Of course, there’s no guarantee I’ll be able to minimise losses or maximise gains, but I want to try and swing the odds in my favour.
Stock market recovery
Three firms that I believe are positioned to profit from an economic recovery are lenders NatWest (LSE: NWG), Barclays (LSE: BARC) and Lloyds (LSE: LLOY).
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These banks bore the brunt of the crisis last year. Worries about solvency led regulators to demand they stop paying dividends to investors. At the same time, losses on loans to clients started to mount. So far, the estimate stands at around £18bn for all lenders, although we won’t know the full picture for some time. The Bank of England (BoE) estimates the final tally will be “somewhat less than £80 billion.”
The good news is, the impact has been nowhere near as bad as expected. Therefore, regulators have allowed the firms to resume dividend payouts. Payouts have been capped at a limited level. Nevertheless, it’s a start, and the move helped improve investor sentiment in the stock market recovery.
I think regulators will become more lenient throughout 2021. I hold this view because each of these lenders has emerged from the crisis in a solid financial position. The average Common Equity Tier 1 (CET1) ratios of Lloyds, NatWest and Barclays rose from 15.6% to 16% in the three months to end-December. That’s substantially above the minimum level the BoE expects lenders to hold.
UK shares on offer
As such, I think it’s reasonable to suggest these lenders may be allowed to return excess capital to shareholders. They may also benefit from increased profitability as the UK economic recovery continues to gain traction. That may lead to improved investor sentiment. All three banks are selling for less than their book value per share. That would make sense if they were struggling to remain solvent, but that’s clearly not the case. I think there’s a good argument to be made that the shares are undervalued at current levels.
Of course, the UK economic and stock market recovery is really yet to take hold. Therefore, these businesses may continue to see increased uncertainty for some time. It’s also impossible to predict when regulators will allow them to return extra capital. Further, low-interest rates have weighed on UK bank profits for the past 10 years. This may continue for the foreseeable future.
So, there are plenty of risks involved with this strategy. It’s not going to be suitable for all investors.
However, I’m comfortable with the level of risk involved here. That’s why I would buy these UK shares for my portfolio today as a way to play the UK stock market recovery.
