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Stock market correction: I’d start buying cheap FTSE 100 shares to build wealth

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In a tough year for markets, the FTSE 100 ended 2022 in positive territory. Including dividends, the big-cap index delivered a positive return of around 5%.

However, the index was propped up by a handful of heavy hitters including Shell (+44%), Glencore (+48%), BAE Systems (+55%) and British American Tobacco (+20%).

In total, only 28 FTSE 100 stocks ended the year with share price gains. The remaining 72 companies ended the year in the red, with some big names suffering serious corrections:

  • Ocado – down 63%

  • Persimmon – down 57%

  • Scottish Mortgage Investment Trust – down 46%

  • JD Sports Fashion – down 42%

  • Taylor Wimpey – down 42%

In all, I reckon 40 FTSE 100 shares suffered a fall of 20% or more last year. That’s why I’d argue that the Footsie really did suffer a stock market correction last year.

I reckon these fallen stocks are where the big opportunities lie today. Although some of these companies may have been overdue a sell-off, I think some of them are now looking cheap.

In the remainder of this piece I’ll highlight three sectors where I see buying opportunities in 2023.

Industrials

Last year’s sell-off hit some big industrial stocks. Respected names such as steam management and pump specialist Spirax Sarco Engineering fell by more than 30%. Testing and certification group Intertek suffered a similar drop.

These market-leading businesses looked pricey at the start of 2022 and still don’t look obviously cheap today. But they both have high profit margins and impressive long-term growth records.

While there’s some risk that a global recession could put further pressure on these firms in 2023, I think they could be good choices today for buy-and-hold investors.

Banks and insurers

Most of the big FTSE 100 banks offer attractive dividend yields and are likely to benefit from higher interest rates.

Although banks face the risk of increased losses on mortgage debt and other lending during a recession, on balance I think they’re well positioned and affordably priced. I hold NatWest Group, but would also consider Lloyds or Barclays.

Insurers such as Aviva and Legal & General also look decent value to me, with dividend yields approaching 8%. Although they’re complicated businesses, I think they’re well run and likely to benefit from higher interest rates.

Housebuilders

Rising mortgage costs and the cost-of-living crisis mean the UK housing market is slowing.

A broad sell-off also means some big housebuilders are now trading below their net asset value with attractive dividend yields. I think these shares are starting to offer good value.

The risk is that we don’t know how far the housing market still has to fall. On the other hand, most FTSE housebuilders seem to be fairly well prepared, with plenty of cash, strong profit margins and low debt levels.

Underlying demand for new homes also still seems strong. I’m interested in companies such as Barratt Developments and Taylor Wimpey at current levels.

Is it time to buy?

There’s no guarantee that these companies will stage a recovery immediately. We could see further market volatility in 2023.

However, I think these are examples of good quality FTSE 100 businesses with the potential to deliver strong investment returns over the medium term.

The post Stock market correction: I’d start buying cheap FTSE 100 shares to build wealth appeared first on The Motley Fool UK.

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Roland Head has positions in British American Tobacco P.l.c., Intertek Group Plc, Legal & General Group Plc, and NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc, British American Tobacco P.l.c., Intertek Group Plc, Lloyds Banking Group Plc, and Ocado Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023