Best UK shares to buy in August 2022

With the odds of a UK, European, and even global recession increasing exponentially, the best UK shares to buy right now are likely to be those which follow a Warren Buffett-inspired investing theme; established companies with a wide defensive moat.

Which are the best stocks to invest in?

The first half of 2022 was not kind to investors worldwide, with international indices slipping into bear market territory as nation states grapple with heightened geopolitical tensions, decades-high inflation, and the accompanying tightening monetary policy.

The UK was no exception. CPI inflation now sits at 9.4% and is expected to exceed 11% by October. The bank rate has already been hiked to 1.25%, and Bank of England governor Andrew Bailey has warned another 50-basis points rise is ‘on the table’ for August.

Meanwhile, BFY has warned annual energy bills could hit £3,850 in January, with winter monthly bills as high as £500. Russia’s gas supply to Europe has fallen to 20% of pre-war levels, and the continent relies on Russia for 40% of its gas needs.

Simultaneously, political sparring between would-be leaders Rishi Sunak and Liz Truss is leading to ever more dire warnings from the Institute for Fiscal Studies that both politicians could send inflation even higher with their respective policies in the battle for Conservative party member votes.

Meanwhile, the International Monetary Fund has warned that the UK will experience the lowest growth of G7 members in 2023. And as analysts globally sound the alarm bell over falling earnings, investors would be wise to choose stocks with strong defensive qualities.

Best stocks to buy now

1) Lloyds (LON: LLOY)

The FTSE 100 bank’s recent Q2 results saw it deliver pre-tax profits of £2.04 billion, narrowly above the £2.01 billion it made in the same quarter last year, while revenue rose by 10% year-over-year to £4.3 billion.

Accordingly, it soundly beat the Refinitiv average analyst expectation of £1.6 billion of profits derived from revenue of £4.1 billion.

Despite setting aside a £200 million impairment charge to account for potential bad loans, Lloyds has raised its full-year forecast, increasing its net interest margin projection (what it earns from lending minus what it pays for deposits) by 10 basis points to 280 basis points. And it expects return on tangible equity — a key banking metric — to be around 13%, a full 2 percentage points higher than previous estimates.

CEO Charlie Nunn has warned ‘the persistency and potential impact of higher inflation remains a source of uncertainty for the UK economy as many consumers grapple with cost-of-living pressures.’ However, with interest rates rising to more profitable levels, the bank is yet to see significant customer distress.

With a near £300 billion open mortgage book, the UK’s largest home lender’s key risk comes from the faltering housing market. While average house prices are at record highs, discretionary income is collapsing due to the wider cost-of-living crisis. Defaults on mortgage payments may soon be making a comeback.

2) Rolls-Royce (LON: RR)

Rolls-Royce was hit hard during the pandemic as demand for the services of its civil aerospace division dried up overnight. With flying demand roaring back, Rolls’ key revenue driver could see impressive earnings next week. Of course, the division could also be an indirect casualty of the Europe-wide airport fiasco.

In addition, the current energy crisis means political support for its proposed small modular reactors, net zero planes, and other green tech remains strong, especially given the government’s golden share. With energy costs rising to apocalyptic highs, the SMRs in particular are likely to see a boost to Rolls-Royce in the long term.

Chair Anita Frew has just appointed BP veteran Tufan Erginbilgic as the company’s new CEO. Frew has emphasised the new CEO’s ‘creation of significant value’ during his time in charge of the ‘complex, multinational’ BP downstream business, an opinion supported by various former co-workers.

Jefferies analyst Chloe Lemarie thinks Erginbilgic a ‘very solid appointment’ given his ‘blend of experience on profitability restoration, industrial sectors and energy transition.’

With Rolls-Royce shares still languishing in penny stock territory, Morgan Stanley has judged them ‘woefully mispriced.’ The bank argues an earnings recovery is ‘much closer than the market has priced in, while earnings and cash flow are directly geared to the next leg of a global aviation recovery.’

A sharp share price recovery could be in the works. Of course, it’s disappointed before.

3) Centrica (LON: CNA)

Centrica, British Gas owner, and recently re-promoted to the FTSE 100, has seen profits soar to £1.34 billion in H1, up from just £262 million in the same half last year.

It notes that ‘the increase in adjusted operating profit was primarily driven by the Upstream businesses, reflecting strong production and generation volumes and the impact of higher commodity prices.’

The waning pandemic combined with the effect of the Ukraine war has seen revenues jump as oil, gas, and nuclear assets soared in value. Accordingly, Centrica is also reinstating dividends despite the likely popular outcry.

It’s also benefitted from strategic repositioning, selling Spirit Energy’s Norwegian and Statfjord UK oil and gas assets earlier this year.

CEO Chris O’Shea argues the company has ‘made significant progress de-risking the Group and building a stronger business for the benefit of all stakeholders,’ and predicts further exceptional performance in H2. However, he accepts now is the ‘most challenging energy crisis in living memory.’

The key risk remains the threat of potential windfall taxes. While both PM contenders previously appeared cold on imposing the taxes on energy suppliers like Centrica, energy bills will soon soar to previously unthinkable levels. The political calculation is changing, especially given the reinstated dividend.

Even so, O’Shea recently warned ‘the recent intervention in the form of a windfall tax in the UK creates uncertainty and damages investor confidence.’ And Centrica insists it is ‘very aware’ of the impact, investing £100 million in support and hiring 500 additional customer service staff at British Gas.

But while the windfall tax threat remains high, so too are expectations of further profits. Energy prices are unlikely to start falling to reasonable levels in the foreseeable future.