As the UK enters Q4 2023, there are several positives to consider. CPI inflation, while still much higher than the target 2%, has fallen to 6.7% from a high of 11.1% in October 2022.

The base rate stands at 5.25%, and while Bank of England officials have hinted one more rate rise is likely, the central bank paused at the last Monetary Policy Committee meeting. And further rises beyond this final one is now considered unlikely.

Moreover, revised economic data from the Office for National Statistics shows that the UK has experienced faster growth than either France or Germany since the end of 2019. Even though growth is still relatively lacklustre, the UK’s economy has grown by 1.8% since the covid-19 pandemic began — compared to a previous estimate of a 0.2% contraction. In addition, the economy grew by 0.3% in Q1 2023, up from the previous estimate of 0.1% growth.

While the HS2 cancellation adds further weight to the argument that the UK is becoming a less certain place to invest, it’s worth remembering that many of the country’s economic problems are global in nature.

Regarding the best UK shares, much of the recent falls can be attributed to the rout in the bond markets — pushing up the price of the US Dollar and lowering the price of oil. And while the bond problem is global, UK 30-year borrowing costs are now at their highest since 1998, with the yield on 30-year government bonds at 5.115% according to Refinitiv.

There are two important implications to consider: first, the bond market movements imply that inflation will be stickier and therefore rates will stay high for longer, even if they are near their peak. Second, governments in the UK and elsewhere now have much less room for tax cuts or increased spending, making generating growth even harder than previously assumed.

Of course, this is an oversimplification, but worth bearing in mind when considering an investment. And remember, past performance is not an indicator of future returns.

Best UK shares to watch

1. Tesco

Tesco shares rose sharply this week after interim results saw the UK’s largest grocer’s retail LFL sales rise by 7.8%, with ‘volume and sales mix trends ahead of expectations.’ Accordingly, retail adjusted operating profit rose by 13.5% to over £1.4 billion, with Tesco bank operating profit up 25% to £65 million, primarily driven by strong income growth.

In statutory terms, revenue was up by 5% at actual rates to £34.1 billion, while operating profit more than doubled to nearly £1.5 billion, but this is mostly a reflection of the comparative period’s £626 million impairment charge. And it even managed to grow its market share by 30bps, with gains both online and in shops.

Further, net debt improved by £605 million since year-end, with the net debt/EBITDA ratio now at just 2.3x. Tesco also announced an interim dividend per share of 3.85p — in line with the dividend policy. In April 2023, the FTSE 100 grocer announced a plan to buy back £750 million of shares by April 2024 — this plan is going well, with £503 million of shares purchased in H1.

Tesco now expects to generate retail free cash flow of between £1.8 billion and £2 billion this year, ahead of its medium-term guidance range of £1.4 billion to £1.8 billion. CEO Ken Murphy highlighted ‘the strong performance in the first half of the year. Food inflation fell across the half and while external pressures remain, we expect that it will continue to do so in the second half of the year.’

AllianceBernstein analyst William Woods noted that the results ‘should be received positively given the concerns around sector profitability amid fears of deflation, which we don’t think is a material risk.’

2. Aviva

Aviva shares jumped this week after Jefferies upgraded the insurer from ‘buy’ to ‘hold’ with a 480p price target — shares are now changing hands for 387p. The analysts forecasted ‘Aviva to deliver a best-in-class capital return yield, underpinned by excess capital and the strongest free cash flow amongst peers.’ Further, it noted that Aviva’s earnings should start shifting towards a capital-light business, improving its prospects as market conditions improve.

Jefferies is forecasting a whopping £5.3 billion of capital returns between 2023 and 2026, equivalent to half of the company’s current market capitalisation. This estimate is fortified by its all-important 2023 forecast 205% Solvency II ratio. And the analysts also think that Aviva could choose to sell off its operations in China and India for circa £1 billion, which could go back to shareholders.

In recent half-year results, Aviva’s operating profit rose by 8% to £715 million, and its interim dividend per share was upped by 8% to 11.1p after buying back £300 million of shares in H1.

CEO Amanda Blanc’s turnaround plan has clearly worked so far — and the CEO enthused that the insurer has more possible growth areas. Indeed, private health insurance sales shot up by 58% to £86 million, and the company has signed up another 17,000 health insurance customers over the past year. Blanc notes that there ‘has been significant growth in demand for things like digital GP.’

3. Superdry

Unlike defensive sector-based Tesco and Aviva, Superdry shares have fallen by 65% year-to-date to just 48p. However, the stock rose this week after the company revealed it had agreed to sell its intellectual property assets in three South Asian countries.

It expects to receive £30.4 million from the resulting new £40 million joint venture — though retains a 24% shareholding over the JV in partnership with Reliance Retail who will hold 76%. The company plans to use the proceeds to boost its liquidity and fund its turnaround plan.

Superdry was suspended from trading at the end of August due to issues with its full-year results audit. However, it has now resumed trading after announcing a £21.7 million pre-tax adjusted full-year loss — compared to a £21.6 million profit in the prior financial year.

It’s worth noting that CEO Julian Dunkerton is now back at the helm — and the £48 million company delivered full-year revenues of £622.5 million. Poor weather and a cost-of-living crisis may be compounding problems, but there may be an opportunity for higher risk investors.