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As someone who invests primarily in UK stocks, I was disappointed with last month’s Budget. Most economists seem to agree that the chancellor’s announcements are likely to keep interest rates high for a long time.
Although the Bank of England (BoE) cut the base rate by 0.25% (7 November), the government’s decision to borrow another £32bn over the next five years means that the pace of future cuts may be slower.
Indeed, the UK 10-year yield is currently (8 November) 0.4% higher than two weeks before the Budget. This benchmark is used to price mortgages and other debt so it is a good indicator of future borrowing costs.
This makes me wonder if I need to change my approach. In a high interest rate environment, now would be a good time for me to focus on UK stocks with low borrowing rates.
To be clear, my definition of debt does not include lease debt. That’s because there is usually a corresponding asset on the company’s balance sheet for this type of debt.
Currently, there are three FTSE 100 shares without borrowing.
Balance sheets are strong
Healthy cash flow has historically helped Persimmon (LSE:PSN) avoid the need to borrow. And without paying interest, this means there is more money left for shareholders. In recent years, the homebuilder has paid out almost all of its profits in dividends.
And when the BoE started to cut interest rates, many thought that this would help increase demand for its properties. Indeed, it expects to build 5.8% more homes in 2024 than in 2023. And its order book is 17% higher than last year.
However, I don’t want to invest yet. And that’s unfortunate because I already own shares in the company!
Uncertainty about the future direction of interest rates makes me think that the housing market recovery may be slow. And I think the government’s decision to reduce the stamp duty limit for first-time buyers will not help.
Also, I was worried when the company said in its trading update on Wednesday (6 November): “We are seeing some signs of rising construction costs starting to emerge in the 2025 price negotiations“.
Unsurprisingly, this sent the company’s shares down sharply.
Another company with no debts Rightmove. But as the owner and operator of the UK’s largest property database, we are also likely to be adversely affected by higher interest rates.
Auto Trader Grouphe is the third Footsie member with no loans or overdrafts. However, the increase in excise duty will affect the profits of car dealers, which may reduce their marketing budget. Also, higher borrowing costs will reduce income and leave less room for drivers to change their cars.
What should I do?
But I have not lost confidence in UK stocks as such I have long believed that they are attractively priced compared to, say, those on the other side of the Atlantic.
While I thought some investors would be attracted to some of the FTSE ‘discussions’ currently available, I don’t think the Budget helped improve sentiment.
However, I still see the potential. I will consider other stock markets, but I will also focus on UK stocks with less exposure to the domestic economy when following the investment scenario.
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