The stock market’s decline over recent months presents buying opportunities for long-term investors.
Certainly, the FTSE 100’s (INDEXFTSE: UKX) 9% year-to-date fall could continue in the short run due to the impact of rising interest rates on economic growth. However, with the economy and stock market having excellent track records of recovery from even their very worst downturns, growth is very likely to return over the coming years.
With that in mind, here are two UK-listed shares that have fallen heavily this year. They now trade on valuations that suggest they offer favourable risk/reward opportunities.
Legal & General
Legal & General’s (LON: LGEN) share price is currently down 33% since the start of the year. It now trades on a forward price-to-earnings ratio of just 6.5, which suggests it offers excellent value for money. Moreover, it has a dividend yield of 9% that further highlights its wide margin of safety alongside excellent income investing potential.
Of course, the firm’s shares have come under pressure of late due partly to the impact of rising interest rates on the pensions sector. Legal & General’s recent trading update highlighted that some pension fund clients and counterparties of its Liability Driven Investment business have experienced challenges over recent weeks.
Encouragingly, the company has a solid financial position through which to overcome present economic uncertainty. It is being strengthened by rising interest rates, while the firm also has attractive growth potential in areas such as pension risk transfer (PRT). This is where pension schemes pay premiums to Legal & General in return for a guarantee that their members will receive retirement benefits. PRT demand in the UK is forecast to be between £150bn and £250bn over the next five years.
In addition, the business has growth opportunities in international markets such as the US and Canada. Although its shares could remain volatile in the near term, the company’s solid finances, growth potential and low valuation suggest it has investment appeal.
Lloyds
Lloyds’ share price has also come under pressure since the start of the year. It is currently down 20% year-to-date as investors have become increasingly concerned about the prospects for the UK economy. Indeed, the Bank of England recently stated that the UK is now in a recession, which could prompt lower demand for the bank’s lending services and may lead to higher default rates.
However, a turbulent period for the UK economy appears to be priced into the firm’s shares. They trade on a forward price-to-earnings ratio of just 6, which suggests they include a wide margin of safety. Furthermore, Lloyds shares currently trade at a 28% discount to tangible net assets per share. This indicates that they offer good value for money on a long-term view.
Although rising interest rates are set to prompt a tough period for the UK economy that may lead to more difficult operating conditions for Lloyds, a tighter monetary policy could benefit the firm over the long run. It allows banks to generate greater profits on their lending activities via a higher net interest margin. After what has been a poor period of return from many banks since the global financial crisis, a more upbeat outlook could ultimately return as the pace of monetary policy tightening moderates.