Hitting rock bottom only looks like a positive after a rebound. There are hopes in equity markets that 2023 served as both a trough and basis for a boost to valuations this year, at least on this side of the Atlantic. The end-of-year rally already put a spring in the step of some markets, thanks to what analysts at Bank of America (BofA) described as the “Goldilocks scenario” – the idea that the economy will slow enough for central bankers to repeatedly cut rates but not by so much that an ensuing recession flattens corporate earnings.
Goldman Sachs this week also reiterated its view that most major economies should avoid a recession this year, with a “meaningful acceleration” expected in real income growth in the UK.
Although Liberum warned that higher wages drove a slump in corporate profits in the second half of last year given companies’ limited pricing power, they remain bullish on the mid- to long-term outlook for UK and European shares, given their low starting point.
“We estimate that UK and European equities should achieve double-digit returns per year in the next 3-10 years, with small- and mid-caps outperforming large-caps,” the broker said. European stocks are trading at a discount of 18.9 per cent to their average dating back to 1996, while the FTSE Small Cap index is trading at a discount of 45.7 per cent.
Of course, this doesn’t mean the gap will automatically close, but the proliferation of private equity bids late last year suggests there is value in the market. And there is no shortage of ideas put forward by brokers about which stocks or funds would make worthwhile investments. With the usual caveat that in some cases brokers will be talking up their own book and that investors should do their own research, we dig into some of the best ideas for 2024.
Jetsetter
One area on which consumers clearly haven’t cut back yet is holidays. And with Jet2 (JET2) replacing Germany’s TUI (TUI) as the UK’s biggest provider of package holidays, Stifel analyst Mark Irvine-Fortescue argued that the company "has been a standout winner in the post-pandemic recovery of leisure travel”. Its market share has grown from 8 per cent in 2017 to 21 per cent, and a consensus pre-tax profit forecast of £500mn for March is 90 per cent higher than pre-pandemic levels, Irvine-Fortescue said.
Despite this, concerns about the durability of consumer spending mean its shares have de-rated and currently trade at around seven times forecast earnings, below their long-run average of 11 times.
In retail, B&M European Value Retail (BME) was highlighted by Peel Hunt as a top growth stock given its potential to take a bigger share of the discount market over the next three years. The acquisition of 51 Wilko stores from administrators last year provided “a year’s worth of openings in one go”, analysts said. Given that B&M’s stores unusually become profitable almost immediately after opening, “more stores mean more profit” in both the short and long term.
B&M’s share price gained 36 per cent last year, but Peel Hunt’s analysts expect the earnings upgrades that underpinned this to continue.
The retailer also featured on Berenberg’s “value+” screen, which highlights companies with low price/earnings and low price/earnings growth (PEG) ratios relative to the market and their own history, as well as "robust" recent earnings momentum and strong forecast medium-term earnings per share growth.
Other large-cap companies to make the screen included British American Tobacco (BAT), GSK (GSK), Standard Chartered (SC) and Tesco (TSCO). Mid-caps meeting the same criteria included insurers Beazley (BEZ) and Just Group (JUST), as well as specialist lenders OSB Group (OSB) and alternative assets investor Intermediate Capital Group (ICG).
Consumer-facing and financials companies are most likely to perform well as the UK’s economy picks up momentum throughout 2024, Berenberg analysts argued.
The more favourable consumer outlook underpinned two of Liberum’s ideas for the property sector – NewRiver Reit (NRR) and Hammerson (HMSO). The former’s interim results in November contained a number of positives, with the company signing more long-term deals, and vacancy rates standing at a record low of 2.3 per cent.
Shopping for discounts
Hammerson – which the IC rates as a sell – is more of a deep value play given that its shares trade at a 42 per cent discount to its net tangible assets. However, the company is enjoying decent rental growth and has been whittling down costs.
Other ideas include RBC Capital Markets’ expectations of a turnaround in Bellway’s (BWY) fortunes and Zeus Capital’s contention that paving block maker Marshalls (MSLH) should be a big beneficiary of operational gearing as DIY markets recover.
Marshalls needed to conserve cash after borrowing over £180mn to buy roofing tile maker Marley just as the market headed south in 2022, but a leaner business should be more profitable as volumes return, Zeus analyst Andy Hanson argued. Although a 35-per-cent gain since the end of October means the company's shares already trade at 17 times earnings, a market recovery “will undoubtedly see earnings materially outstrip analyst estimates”, he said.
