Top 5 UK Stocks To Trade In 2024

The UK stock market in 2023 was characterised by high levels of volatility and uncertainty. But as the possibility of interest rate cuts grows, markets closed 2023 with a more optimistic tone. While optimism surrounds a potential soft landing for the US, growth projections for the UK and Eurozone have been revised downwards.

Against this backdrop, we’ve identified 5 UK stocks worth watching in 2024:

1. BAE Systems (LON: BA)
2. British American Tobacco (LON: BATS)
3. Lloyds Banking Group (LON: LLOY)
4. BP (LON: BP)
5. SSE (LON: SSE)

You can trade or invest in these stocks at our top-rated brokers below. They are trusted and offer either direct share dealing or speculating on share prices using derivatives.

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The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

1. BAE Systems (LON: BA)

BAE Systems (BA) holds established positions within various significant global defence programs. The forecast for defence spending appears optimistic, given escalating global threats, particularly heightened by the conflict in Ukraine.

I anticipate this trend to unfold as a multiyear growth trajectory, considering that many nations, notably in Europe, have underinvested in defence since the conclusion of the Cold War. Furthermore, BAE Systems is well positioned to benefit from growth programs within the US Department of Defense.

BAE Systems occupies a significant position within the defence market, allowing the company to outperform the broader market comfortably throughout 2023. The recent trading update in November reiterated its full-year targets, anticipating sales and underlying operating profits to grow within the range of 5-7% and 6-8% respectively.

Throughout 2023, there was a notable surge in demand for BAE’s products and services, contributing over £30 billion to the order book by the latest assessment. Given the heightened tensions in the Middle East, it’s anticipated that this figure will likely increase by the end of the year.

While this backlog ensures a clear visibility into future revenues, it’s important to remember that profitability relies on accurately forecasting forthcoming costs. Lengthy contracts introduce the potential for evolving risks and expenses over time, requiring sustained attention to avoid pitfalls.

The major highlight of the year centred on the acquisition of Ball Aerospace for $5.55 billion, a move that appears well-aligned with BAE Systems’ strategy.

Ball Aerospace holds unique expertise in crucial space and nuclear deterrence technologies. The acquisition is progressing through clearance procedures and is expected to conclude in the first half of 2024.

Initial estimations suggested that this acquisition would contribute over $2 billion to BAE’s annual revenues. However, with efficient utilisation of expertise and resources, there’s potential for this figure to increase substantially, possibly doubling or tripling, though such outcomes aren’t assured.

As we enter the New Year, BAE Systems remains among my preferred choices in the sector.

2. British American Tobacco (LON: BATS)

The introduction of e-cigarettes marks the most substantial transformation in the tobacco sector since the 1960s. While early versions of e-cigarettes have been around for a generation, consumer behaviour has shifted, displaying arguably less brand loyalty and heightened health consciousness.

Consequently, the industry is evolving toward next-generation nicotine-based products. Although cigarettes are expected to continue dominating industry profits in the next decade, major tobacco companies are focusing their investments on new categories to attract a share of the smoking market.

British American Tobacco (BATS) is projecting organic revenue growth for 2023 to hover at the lower end of the 3-5% range, primarily due to ongoing pressure on US combustible sales. Consequently, this pressure has impacted the company’s valuation over the course of 2023. However, amidst these challenges, there remains optimism for the future.

New categories are anticipated to have achieved near-breakeven status last year, hitting this milestone two years earlier than initially anticipated. The company has set an ambitious target for non-combustibles to drive 50% of revenues by 2035, although regulatory scrutiny poses a significant hurdle to this objective.

BATS also has robust cash generation. With an anticipated cash conversion rate nearing 100%, I believe the company is well-equipped to invest appropriately in transitioning away from cigarettes.

Moreover, this financial strength allows BATS to sustain an appealing dividend yield, which has now entered double-digit territory following a consistent decline in the company’s market value. Yet, it’s important to note that yields don’t assure future income.

The decrease in valuation indicates that there’s still work needed to convince investors about the potential to support BATS’ future growth. Successfully executing this strategy could potentially lead to a reassessment, although accomplishing this won’t be without its challenges.

3. Lloyds Banking Group PLC (LON: LLOY)

Lloyds operates predominantly within the UK banking sector, with 95% of its assets based domestically. Following its extensive restructuring initiative that commenced in 2011, the bank has transformed into a low-risk entity focused on domestic retail and commercial banking.

It has divested approximately £190 billion in runoff assets and £200 billion in risk-weighted assets, notably decreasing reliance on wholesale funding. Presently, Lloyds holds one of the most robust retail franchises in the UK.

The sentiment toward UK banks isn’t particularly positive at the time of writing. After experiencing a surge in interest income due to rising rates in the past year, it seems that this trend has reached its peak.

Compounded by a cost-of-living crisis that raises concerns about borrowers’ ability to repay loans in 2024, investors are understandably cautious. However, there are several positive factors at play that I believe the markets haven’t fully factored in.

Mortgages issued during the pandemic are approaching renewal at less profitable rates. This will pose a challenge in 2024 but is anticipated to gradually diminish, possibly by the year’s end or even earlier. Additionally, there’s a structural hedge employed by banks to mitigate the volatility stemming from interest rate fluctuations.

Contrary to expectations, loan defaults have remained lower than anticipated, with Lloyds observing no significant increase in arrears. While this situation could change, the economic forecast is displaying signs of improvement. Lloyds also boasts a robust mortgage portfolio, which could be considered more resilient compared to its counterparts.

Lloyds shares surged in 2023 due to optimism about a potential peak in interest rates and a projected future reduction by the Bank of England.

Market forecasts indicate a possible decrease in the current base rate of 5.25% by a full percentage point to 4.25% within the next year. This expectation has prompted a decline in mortgage rates, easing the pressure on homeowners whose ultra-low fixed rates are due to expire soon.

4. BP (LON: BP)

BP functions as an integrated oil and gas corporation engaged in global oil exploration, production, and refining.

In 2022, it achieved a daily production of 1.1 million barrels of liquids and 6.9 billion cubic feet of natural gas. As of the close of 2022, its reserves totalled 7.2 billion barrels of oil equivalent, with liquids accounting for 56% of this reserve.

The company manages refineries with a combined capacity of 1.6 million barrels of oil per day. Additionally, BP holds a 20% ownership stake in Rosneft, a share it plans to divest from in the future.

BP had initially projected a production decrease of 25% by 2025 and 40% by 2030. However, the updated plan outlines a slight production increase until 2025, followed by a reduction of about 25% from 2019 levels by 2030, primarily achieved through divestments.

Concurrently, the company aims to enhance upstream profitability by introducing higher margin volumes from significant projects and implementing cost-cutting measures.

During the second quarter of 2023, BP and fellow energy giants observed a substantial year-on-year profit decrease, mainly attributed to reduced fossil fuel prices, which have since shown a considerable recovery. Intriguingly, BP and similar entities reported record-breaking annual earnings in 2022.

Moving forward, BP’s projections indicate an anticipation of production limits among Organization of the Petroleum Exporting Countries (OPEC) members and an upsurge in demand, expected to bolster oil prices.

Furthermore, the company foresees a significant decline in industry refining margins in the fourth quarter.

5. SSE Plc (LON: SSE)

SSE stands as the singular integrated British utility. Within its wholesale generation unit, approximately 10.8 gigawatts are in operation, with 4 GW attributed to hydro and wind capacity. Forecasts suggest that the primary driver for earnings growth will be renewable power generation.

This surge is anticipated upon the commissioning of 5 GW of new onshore and offshore wind net capacity in the UK by fiscal 2028, coupled with an increase in realized power prices. Meanwhile, the contribution of renewables to the group’s EBIT is expected to surge from 23% to 49% on an adjusted basis.

SSE recently announced a remarkable 65% increase in adjusted operating profit, reaching £2.53 billion. However, the company incurred a reported loss of £146.3 million, primarily due to unfavourable fair value movements on derivatives.

Given the substantial need for capital investments in constructing its energy infrastructure, overall profits have been impacted. This necessity led the management to recently recalibrate its dividend in response to the financial implications shaped by these capital expenditures.

Recent share sell-offs can be attributed to heightened interest rates, unwarranted association with Orsted’s challenges in the US, and the scaled-back energy goals of the UK government, resulting in a decline in UK carbon prices.

Despite this, the shares are currently significantly undervalued, displaying a fiscal 2024 P/E ratio of 10, despite their appealing position.

SSE boasts a robust renewable energy presence, complemented by combined cycle gas turbines (CCGTs), and inflation-indexed transmission and distribution networks.

Bottom Line

These 5 UK stocks, backed by robust fundamentals and evident investor interest, could yield profits for traders who choose to invest in them.

However, it’s crucial you perform your own comprehensive analysis and research before acquiring any specific asset to mitigate risks.

Open an account with one of our top UK stock brokers to get started.

The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.