It's Tips of the Year time once again and, following a successful 2015 (see the Tips of the Year Review), one of the big dilemmas facing the IC team in choosing eight shares for 2016 is the same as the big question we grappled with this time last year - the decision we made in 2015 was ultimately a big contributory factor to last year's 22 per cent outperformance of the FTSE All-Share. The dilemma in question is whether or not it's time to buy into the battered resources sector.
Our decision on this thorny issue for 2016 has been the same as the one we made last year: we are steering clear. In fact, the decision felt easier to make this year, but in itself this should perhaps serve as something of a warning sign. Indeed, when it comes to bear markets - whether sector-specific or marketwide - it's the point of maximum investor revulsion that usually signals the best time to buy. Still, while we're mindful of how quickly market sentiment can change, there seems very little to recommend the commodity markets at the moment.
Much of the current resources angst comes down to fears about the outlook for the Chinese economy, which has also had a knock-on effect for other emerging markets. Call us chicken, but again we don't feel the time is yet ripe to play the contrarian game on the geographical front either. Our eight share picks for 2016 definitely have a leaning towards the UK economy. We're acutely aware we could easily end up ruing both these 'risk-off' decisions given how much trends tend to change in the space of a year and will continue to provide suggestions on how bold readers can play these contrarian themes in our Tips of the Week section in 2016. From the geographical perspective, we're also getting exposure to the recovering European economy through rigid plastics packaging group RPC (RPC), our Old Reliable tip of the year. There is also a good dollop of US exposure through our Overseas Tip of the Year Disney (US:DIS) and Value Tip of the Year BAE (BA.).
BAE is one of a number of the tips that we think will benefit from improving trading trends in 2016. Recent budget decisions both at home and across the pond set the scene for the long-running dribble of earnings downgrades at BAE to be reversed. Contrarian Tip of the Year J Sainsbury (SBRY) is at an even earlier stage when it comes to seeing a change in its fortunes and the challenge from discounters remains rife. However, signs of strong Christmas trading and a reduction in quarterly like-for-like sales declines makes the group the stand-out pick among the big four supermarkets and the valuation - including a very attractive forecast yield - looks enticing as long as trading stabilises.
Both BAE and Sainsbury have noteworthy pension deficits. Interestingly, this could become something of a positive in 2016 depending on how the anticipated rate tightening cycle develops. Rising rates can affect actuarial assumptions, thereby lowering reported pension deficits and causing investors to reappraise company valuations. We'll have to wait and see if this plays out in any way shape or form, but the prospects of rising rates certainly make us feel more sanguine about taking on pension related risks with our 2016 picks.
Housebuilder MJ Gleeson (GLE) is another company that is seeing positive end-market trends, but in its case these trends are very well established and have been feeding through to a persistent stream of broker forecast upgrades. We think this process has further to run as recent changes to housing policy play firmly into Gleeson's hands, given its thriving affordable housing business. The group's focus on affordable housing has also kept it out of the buy-to-let market, which is likely to be hit by recent policy changes. Gleeson is our Growth Tip of the Year.
Another property trend we are hoping to tap into is the spread of property valuation growth from the capital to the regions and in particular to the type of high-yielding secondary property that our Income tip of the Year, NewRiver Retail (NRR), specialises in. However, the market trends are the icing on the cake with this one as we expect rising dividend cover and plans to move the shares' listing to the main market to make a new investor audience sit up and take notice of its handsome, paid-quarterly prospective yield, which stands at 5 per cent for the current year, rising to 5.5 per cent the year after.
Lloyds Banking (LLOY), our Recovery Tip of the Year, can also be regarded as something of a yield play, even though the historic dividend is low. After several years of post-credit-crunch recuperation, we think the company is on the verge of re-establishing itself as a reliable UK blue-chip income stalwart just at a time when this type of stock is looking increasingly scarce. The government's public share sale should also attract attention to Lloyds' investment virtues.
The only real minnow among our Tips of the Year is Takeover tip of the year £75m Penna (PNA). The company is operating in a niche part of the staffing market and two similarly small, international peers have recently been bought by global recruitment giants. What's more, we think Penna is a great little business in its own right and offers solid upside potential even if buyers do not start circling.
Finally, as Walt Disney once again proves its ability to make established media brands throw off cash with the release of its first Star Wars movie since buying Lucasfilm in 2012, we are recommending the shares. We sniff a buying opportunity in a recent spell of share price weakness, caused by fears over the digital threat faced by ESPN and substantial profit-taking following an impressive share price run that occurred ahead of the much-hyped Star Wars release.
We're excited about our picks for 2016, but are also ever wary that things could go awry. We'll be on the watch for any cracks emerging in our investment cases and will keep readers up to date as the year goes on.
