The coming year is sure to be another turbulent one. In fact, Ethan Ilzetzki, an assistant professor at the London School of Economics, views the current global economic environment as "the most uncertain in modern history". On 20 January 2017 President-elect Donald Trump will be inaugurated, by April the UK government will have served Article 50 and general elections in France and Germany later in the year could prove to be thorny affairs considering the cloud currently hanging over the EU. So, as evidenced by last year's chain of surprising political events, it's unlikely to be an easy ride for private investors.
There's already plenty of debate around which stocks will weather the current storm. With the pound struggling, internationally focused companies look good and those that are negatively exposed to sterling best avoided. The safety of big brands or defensive products is also attractive. However, many of the companies considered to be safe havens are already demanding lofty valuations.
But on London's junior market there remain some overlooked gems, which could be unaffected by 'Trumponomics' or Brexit mania. These are stable, well-managed businesses that offer everyday products or services. They are - for want of a word with fewer negative connotations - boring. But perhaps a bit of boring is just what's needed in this turbulent climate and 2017 will be the year that some of the less glamorous companies earn their portfolio place.
A supporting hand
Even in the wider FTSE, the support services sector often gets ignored. Granted, its exposure to the UK economy is a concern right now, but the diversity between the various support services companies means there are plenty of safer picks. Plus, support services don't have to be UK-centric - RWS Holdings (RWS), for example, supports global businesses with their intellectual property needs. The group earns plenty of revenue in euros and US dollars, even more so since acquiring a life sciences patent business across the pond. The group is highly cash-generative and uses those funds wisely, reinvesting regularly in bolt-on deals.
Empresaria (EMR) also generates less than half its turnover in the UK. As a provider of international staffing solutions to small businesses it's not really surprising that this group fails to capture headlines, but there's a lot to like in its business structure and management. Another small business service provider is Utilitywise (UTW), which offers energy procurement and management services. The company uses phone marketing to attract new customers and it seems to be working, with the group recently reporting a tidy boost in profits.
Gateley (GTLY) attracted much attention when it became the UK's first listed law firm, but since then it's chugged along below the radar. The group spent much of 2016 using its 'PLC' status to acquire businesses outside of the traditional legal spectrum, in turn helping to diversify its income stream.
Logistics
Data is another commodity that's growing in value. But data analysis and logistics providers are yet to feel the benefits. Anyone who has tried to drive through the Blackwall Tunnel on a Friday afternoon will agree that traffic and transportation management in the UK is a growing problem. Tracsis (TRCS) is helping to solve the problem. The group provides data capture, analysis and interpretation of traffic and pedestrian data to aid with the planning, investment and ultimate operations of a transport environment. There have been plenty of acquisitions over the past few months, with more in the pipeline, and growth opportunities in North America look attractive.
DX Group (DX.) is a logistics and parcel distribution business that has recently attracted a pretty sizeable Home Office contract. It's not the only small cap company benefiting from the e-commerce boom. Main market-listed* Macfarlane (MACF), a packaging and manufacturing group, reported in November that it was already seeing the benefits of a surge in online transactions over Christmas.
Industrial revolution
Industrial companies are highly cyclical in nature. But Aim plays host to some that operate in important areas, so important they're unlikely to be hurt by cyclical trends. Fulcrum (FCRM), for example, is an independent multi-utility infrastructure and services provider whose primary business is the provision of unregulated utility connection services to the residential, commercial and industrial markets. Hardly a catchy business description, but Fulcrum's business structure is exciting. Through its subsidiary, Fulcrum Pipelines Limited, the group is licensed as an independent gas transporter and can therefore earn recurring revenue by operating pipelines. Last year the company added to its services by commencing commercial meter management and also intends to move into the electricity sector by adopting and operating electrical assets.
Somero Enterprises (SOM) operates in a much more niche market, but its products are no less important. Somero manufactures laser-guided machinery used in horizontal concrete placement, to "advance the productivity, concrete flatness and efficiency of the jobsite". This kind of machinery is crucial in product and distribution warehouses which demand perfectly flat surfaces. Even better - given investors' current penchant for international stocks - Somero earns 70 per cent of its revenue in the US.
Another type of flooring is provided by James Halstead (JHD) - widely regarded as one of Aim's blue-chip stocks. Considering the group has provided flooring for commercial spaces across the UK and abroad for the past 102 years, it seems this is a company that knows how to see out economic and political turbulence.
IC VIEW:
Critics argue that Aim is risky, but if you do your homework, the market offers some excellent but overlooked companies where there’s value to be found. And value investing is a trend in the current market, replacing investors’ desire for high-growth, high-risk stocks.
Graham Bird, fund manager at Gresham House, which specialises in Aim companies, thinks the market is going to do well in 2017. His advice is to look beyond the current economic turmoil and invest in companies that are intrinsically undervalued and offer opportunities for growth over a three- to five-year horizon.
For Paul Mumford, who runs the specialist Aim fund at Cavendish, a well-balanced portfolio is key. His top sector picks on Aim for 2017 are oil & gas and healthcare, based on the fact that they are undervalued. We agree that a well-balanced portfolio should include some higher-risk sectors that could grow strongly in 2017 – but investing in some of the market’s steady and reliable performers could be a good strategy in an uncertain year.
Favourites:
Fulcrum has a solid business model, combining short-term contracting and long-term asset ownership, which offers good long-term visibility over earnings and returns from its growing portfolio of pipeline assets. We're also recommending that investors buy Somero Holdings. Its decent cash pile, solid dividend yield and high US exposure makes it a top pick for 2017.
Outsiders:
DX Group shares never really recovered from a whopping profit warning at the end of 2015 and now investors are worried about the dividend coverage. Those prepared to take the risk would be rewarded with a very attractive yield, but we're not recommending it. There are also concerns over Utilitywise, this time surrounding cash flows, so we're on the fence. Woodford Asset Management clearly rates the stock, though, currently holding 27 per cent.
*The original version of this article incorrectly stated that Macfarlane was Aim-listed
