After a bruising 2018, the format of our Tips of the Year is changing a bit. From a sector perspective, the list of eight tips is less diverse than usual and less perspective by virtue of not being forced to fit with a pre-determined selection of categories (Value, Growth, Contrarian, Recovery, Takeover etc). That’s not to say readers will not find tips that fit with such themes. Brickmaker Forterra (FORT) and airline company easyJet (EZJ) certainly fit the bill as value plays, for instance. Meanwhile, London Stock Exchange (LSE) has been a perennial takeover target and industry dynamics means this could prove the year it finally gets taken out. Meanwhile, battered telecoms giant BT (BT.) is definitely contrarian and also a recovery play. However, we hope there will be virtue in trying to concentrate on substance over catchy themes, especially given the market’s nervous mood.
The new year could certainly prove a tough one for investors. The market volatility that set in at the start of October currently shows little sign of abating – not that turns in the market tend to be telegraphed. And whereas 12 months ago all the talk was of synchronised global growth, fears are now mounting of a global slowdown. It’s not only that investors fear repercussions from the US/China trade war; a number of lead indicators are flashing warning signs. The weak oil price, widening spreads for low-grade bonds and a flattening US yield curve being some choice examples.
However, central to the bear case is the view that markets face severe repercussions from the end to the period of exceptionally loose monetary policy, which has required investors to take on high levels of risk in order to generate even meagre returns.
While the UK’s central bank is behind the crowd when it comes to tightening monetary policy, that is not reason to think the UK will prove immune to this theme. In fact, being behind the crowd reflects the added uncertainties the UK faces, especially about the economic upshot from Brexit. Indeed, the issue of Brexit has led some to brand our domestic market ‘uninvestable’. For contrarians, such alarmist talk is an invitation to dive in. Indeed, while it is easy to suggest scary economic scenarios for the UK, if UK and EU politicians do manage to muddle through to some kind of solution that is begrudgingly accepted by both sides, then cheap domestically-focused stocks could benefit significantly. Our Tips of the Year certainly embrace their share of domestic themes as well as shares in quality companies that have been de-rated due to the current global economic concerns.
And if there is a global economic slowdown on the horizon, in certain industries stronger companies should be able to benefit from the travails of weaker rivals. EasyJet, a well-invested low-cost airline with an enviable network of slots at prime European airports, for example, should benefit from such dynamics as well as the recent weakening of the oil price. Shares in defensive businesses, such as BT’s, could also prove attractive if the economic backdrop does worsen.
Businesses that benefit from structural growth in their end market could also prove capable of bucking negative trends in the wider economy. Situations that could end up playing to this theme in the coming year include: UK housing targets that could prop up demand for Forterra’s bricks even if the housing market weakens; consumers switching from spending on material items to spending on experiences, which may continue to benefit Hollywood Bowl (BOWL); the pricing power of financial data providers such as London Stock Exchange; and the growth opportunities in travel-hub retail being exploited by WH Smith (SMWH). None of these themes are without exposure to the economic and market cycle, but all offer some protection.
However, while there is value to be found in UK stocks and potential opportunities from some recent de-ratings, after a near-decade-long bull run, some of the best companies on the UK market come with very high price tags. High valuations are always a risk, but could prove to be particularly so in the coming year. But even among companies that would classically be classed as ‘bond-proxies’ (high-quality companies paying reliable and growing dividends) there’s the odd opportunity. We feel Britvic (BVIC) is a case in point. It has faced a number of one-off issues in 2018, but these now appear to be behind the soft-drinks company and it is highly likely that in 12 months’ time the mood will once again be starkly different to what it is now. But, regardless of whether it is different for the worse, or hopefully, the better, the shares of some companies will have performed well in the interim. We hope the eight shares we’ve selected for 2019 stand a good chance of being among them.
Buy into WH Smith's global ambition
Britvic breaks out the bubbles
Value in easyJet altitude drop
BT goes from basket case to bull case
Strike big with Hollywood Bowl
Make room for InterContinental
