Are these the best UK shares to watch in September 2023?

Investors in UK shares continue to wade through the uncertainty of 2023. CPI inflation now stands at 6.8% — down from 7.9% in June — with the Bank of England base rate at 5.25%. Encouragingly, Governor Andrew Bailey still expects inflation to fall ‘markedly’ by the end of the year — telling the Commons Treasury Committee that rates are ‘much nearer now to the top of the cycle.’

There are a few further hints that rates could be near their peak (with the caveat that most analysts didn’t foresee rates as they are now). ISA deposits rose from £2.9 billion in June to £4.3 billion in July, perhaps indicating savers think a peak in rates is near. And NS&I has launched a 6.2% return guaranteed growth bond. Rarely for NS&I, this product is market-leading, again suggesting rates could be due to fall.

With the money supply stopping growing in July for the first time in 13 years, former Bank Governor Mervyn King has warned that if the MPC ‘carry on for the next six months or so, tightening monetary policy, it could be that they generate a recession as well as a sharp fall in inflation.’

On the other hand, ONS GDP revisions show that the UK economy has made a much stronger recovery from the effects of the covid-19 pandemic than previously thought.

And it’s in this uncertain environment that UK investors are seeking the best value shares. Of course, where there’s uncertainty, there’s often opportunity.

But remember, past performance is not an indicator of future returns.

Best UK shares to watch

1. Persimmon

Persimmon's half-year results cemented its demotion from the FTSE 100 — with underlying 12-month rolling return on average capital employed dropping from 30.9% to 21.1%, new home completions down to 4,249 from 6,652 in the same half last year, revenue dropping from £1.69 billion to £1.19 billion, and profits collapsing from £440 million to just £151 million.

Of course, in an era of rising rates and falling house prices, these numbers were perhaps to be expected. For context, Halifax — the country’s biggest mortgage lender — has data showing that prices fell by 4.6% over the past year in August, the largest year-on-year decrease since 2009, during the economic bloodbath of the Global Financial Crisis.

Meanwhile, Zoopla now expects home sales to fall by 20% in 2023 to their lowest volume since 2012. And the Bank of England reported another fall in mortgage approvals from 54,600 in June to just 49,600 in July, the tenth consecutive month where approvals have been below the 2022 average of 62,700.

Persimmon shares have now lost more than two-thirds of their value since February 2020, but this real estate is a cyclical industry. The recent proposed relaxation of nutrient neutrality laws, significant wage growth, and mortgage price wars among lenders are all good signs.

For long-term investors considering past performance, the current dip may be looking attractive. Especially with an election looming in the not too distant future, some speculate that another political intervention along the lines of Help to Buy or Stamp Duty stimulus could be in the works.

2. Legal & General

Legal & General continues to be one of the best UK shares to watch, and for good reason. The dividend royalty’s H1 earnings delivered operating profit of £941 million, slightly lower year-over-year, but a solid beat compared to its company-compiled consensus poll.

In addition, the all-important Solvency II coverage ratio now stands at a remarkable 230%, up from 212% in H1 2022 and demonstrating a £9.2 billion surplus. Accordingly, LGEN has managed to keep to its policy of annual dividend growth of 5% per year until fiscal 2024, delivering a 5.71p distribution for the half.

And given that it’s achieved capital generation of £5.9 billion midway through this policy, while only paying out £3.6 billion, LGEN now boasts £600 million in net surplus generation.

However, the company’s shares are down by 15.1% year-to-date, despite the 9.2% dividend yield. This probably reflects the fall of assets under management, which are down by 10% over the year to the end of June — it’s hard for some investors and accountholders alike to turn down guaranteed 6%+ returns with no risk.

Rising rates also make it easier for defined benefit pension scheme operators to offload pension risk to the insurers, but with rates near apparently their peak, Legal & General shares may now be attractive for dividend investors with a long time horizon.

3. Glencore

Glencore shares have dropped by 22% year-to-date, leaving the popular FTSE 100 miner with an 8.2% dividend yield — though this is only covered by 1.4x forecast earnings. For balance, this may not be enough to maintain the dividend if the current downturn intensifies.

The company has been hit by falling commodity prices, with H1 revenue falling by 20% to $107.4 billion, adjusted EBITDA more than halving to $9.4 billion, and net debt rocketing to over $1.5 billion.

The company is particularly susceptible to weaker Chinese demand — with investor sentiment perhaps further dampened by recent Chinese emergency fiscal steps to help restore its ailing growth story. In particular, coal has fallen sharply, hitting the company’s commodity trading division just as much as the mining operations.

However, CEO Gary Nagle notes that ‘moderating inflation and supportive government policy in China across key sectors are bringing a more positive macroeconomic backdrop in the second half of 2023.’ And the CEO is putting cash where his words are, setting aside billions for the hoped-for merger with Canada’s Teck Resources.

Whether China’s economic decisions are positive or negative is of course a question of perspective.
And there’s a still a myriad of legal troubles to settle.

But in the end analysis, Glencore delivered $5.2 billion of dividends and share buybacks in the last half — and with the green energy revolution on the road, the longer-term future of the company seems relatively secure.