Tips of the Year 2020

Welcome to the Investors Chronicle’s 2020 Tips of the Year

January 2, 2020

As our new decade gets under way, there’s plenty of uncertainty about what the next 12 months may hold for investors. While our 2020 Tips of the Year are primarily focused on highlighting strong investment cases rather than crystal-ball-gazing, they all the same offer angles on a few of 2020’s known unknowns.

Brexit part II – The Trade Deal – looks set to be a dominant influence on both sterling and sentiment towards the shares of domestically focused companies. The size of the new Conservative government’s majority should help keep more extreme political influences in check and support a bit more parliamentary harmony.

While the new government has set into law an end-of-year deadline for a trade deal with Europe, there is plenty of scepticism about this timetable, as well as a belief that the powerful majority the new government possesses means the deadline could easily be extended. The EU may also want to drive a hard bargain for fear of encouraging other disgruntled EU members from heading for the exit. This backdrop could conspire to keep a lid on sterling, which has already lost its post-election gains.

A weak pound should help make UK companies look attractive as takeover targets. We think our Tip of the Year Grainger (GRI) could prove a case in point. The company has traditionally managed a portfolio of rent-controlled residential properties, which it has sold as tenants vacated. However, over recent years the company has been moving into the private rented sector (PRS), which appears to have strong prospects due to a shortage of rental properties and is attracting interest from overseas investors. PRS developer Telford Homes was taken over last year. Luxury fashion group Burberry (BRBY) could also prove a takeover target following recent deals (attempted and successful) in its sector.

Dealmaking is also central to our enthusiasm for insurance group Phoenix (PHNX). While there are risks associated with its recent £3.2bn megadeal to buy fellow closed-book consolidator ReAssure, the potential for cost savings and cash payouts to shareholders is also considerable.

The significance of a large Conservative majority goes beyond the 'Get Brexit Done' mantra. With every party promising a dash of fiscal largesse while campaigning for the winter election, the UK economy may get a shot in the arm in 2020. The election result also removes market fears of a noteworthy increase in regulation and nationalisations, as promised by Labour. As well as benefiting Grainger, which is sensitive to house prices, a strong UK economy should benefit cyclical and operationally geared companies, such as our Tip of the Year Speedy Hire (SDY). Workwear and hotel linen rental group Johnson Service (JSG) should also benefit, although more significant for it should be the addition of new laundry capacity in Leeds.

The UK economy could become something of a global economic bright spot in 2020 given the slowdown in the broader world economy during 2019. Anxieties about global growth prospects reached a peak during August last year. However, the mood has been brightening as the year has wound to its end, helped by monetary loosening in Europe, the US and China. And while we are yet to any indicators of a rollicking recovery, there are still grounds to think things will get better as 2020 progresses. A US/China trade deal may be getting closer and the upcoming US election means President Trump has every incentive to keep the American economy strong.

A beneficiary could be the copper price, which is often seen as a barometer for the health of the global economy. Supply of the red metal is relatively tight and weakened demand from China already looks well priced in. That means positive surprises could produce a strong run that should benefit the shares of copper miners, such as Tip of the Year Antofagasta (ANTO). That said, Antofagasta is unlikely to be the most favoured pick for out-and-out copper bulls. The company’s strong balance sheet, the quality of its mines and its gold output make it a defensive play on this theme – in as far as any company can be described as defensive in this notoriously cyclical sector.

While economies will always have their ups and downs, there are a number of themes that have the potential to play out for many years to come. One of these is the growth in environmental regulation. Air purification specialist Porvair (PRV) looks well placed to benefit for many years to come, while its growth record suggests the business is well managed. The use of artificial intelligence (AI) and big data is another source of potential long-term gain for investors. Our Tip of the Year Relx (RLX), which has recently sold its last print magazine, is well positioned to continue to exploit this theme. AI and smart use of data is also being used to help enhance Speedy Hire’s business and ensure its customers can get hold of the equipment they want, when they want it.