The financial markets are ending the year with hopes that inflation has peaked and interest rates may be cut in the coming months.
That could be good news for investors hoping for stock market growth but there are still risks such as geopolitical tensions as well as the prospect of a recession in the UK and US.
Investors may be wondering which are the best stocks to select in such an uncertain environment where interest rates are expected to be higher for longer.
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The economy and political uncertainty, especially with elections ahead in both the UK and US, may tempt investors into more defensive stocks but it could also be a good market for contrarians to find unloved or undervalued stocks.
We asked analysts and fund managers to select some top stocks to back in the new year.
Rio Tinto
The S&P 500 has already had a bumper year thanks to rising interest in technology stocks and artificial intelligence, but the FTSE has lagged.
Miner Rio Tinto is a prime example of a FTSE-listed firm that has struggled, says Chris Beauchamp, chief market analyst at IG Group, but it may look cheap now with its shares at 9.4 times earnings.
“Now that the dollar is in retreat and recession fears are fading, the time might be ripe for a decent rally in commodity prices that can reinvigorate the mining sector,” he says.
“While it has taken a knock from the problems in its iron ore business, rising prices and increased shipments have offset the weakness to an extent. Commodity demand should continue to pick up as confidence in the economy returns, and the 5%-plus yield will boost the attraction of the shares.”
UK banks
UK banks have also struggled to hold to their gains from the first months of the year, says Beauchamp, but may benefit as interest rates are cut and pressure on households recedes.
“Now the UK economy seems to have at least a less-worse outlook ahead of it, and in that case perhaps Lloyds, NatWest and Barclays are worth a look,” he adds.
“While interest rates might come down, the boost from interest income will remain to an extent, and the lower risk of default gives more predictability to their performance over the year ahead”
NatWest and Barclays remain at “bargain basement valuations” of, around 4.5 times earnings, says Beauchamp while Lloyds is more expensive but its high dividend coverage ratio provides an additional attraction.
Adidas
It was a tough year for sports brand Adidas after its split with controversial rapper Kanye West after he made anti-Semitic remarks, while it has lost market share in China after it joined other Western brands in refusing to use Xinjiang cotton which has been linked to human rights abuses.
But Mamta Valechha, equity research analyst at Quilter Cheviot, says there are reasons to feel positive.
“With the new chief executive starting in January, the Adidas story has gone from hopes to hard data. We have seen growth in brand heat - the Samba is officially the shoe of the year, and the China backlash is gone - Chinese influencers and sportspeople are willing to work with Adidas again.
“Yeezy was a big risk going into this year, the first two tranches were sold immediately, and we expect adidas to sell the remainder next year. Finally with Lionel Messi moving to Inter Miami, this has driven a huge amount of brand heat in the US for football merchandise.”
Valechha highlights that orders for the first half of 2024 have already been placed by retailers and second half orders are being placed now, so management has great visibility going into next year and remains very bullish.
“The next key catalyst is the 2024 guide, which will shape expectations to the pathway to double-digit margins, and the set up looks great – management has set the bar intentionally low, the channel is being destocked and the strong brand heat driving full price sales,” adds Valechha.
JD Sports
Another sportswear play is JD Sports, a mainstay of many highstreets and shopping centres.
“We believe JD’s positioning as a global brand and sportswear retailer and its international opportunity is underappreciated by the market,” adds Valechha.
“JD remains the most important global strategic partner for top sportswear brands including Nike and adidas, which gives it access to superior product allocations, exclusive products, and is also directly benefiting from sports brands consolidation among wholesale partners. JD also has a well-invested store estate, which is complemented by its strong digital capabilities.”
Valechha adds that improving profitability in international markets and acquired businesses also presents a material tailwind to group earnings, adding: “Given its strong cash position, there is also an opportunity for JD to expand through M&A, where it has a strong track record of creating value.”
AMD
Nvidia has been one of the top performers during 2023 but Ben Barringer, technology analyst at Quilter Cheviot, suggests chipmaker AMD could be a worthy challenger.
“AMD has a lot of potential as we look to 2024 given it has strong new AI chips and is also building software and networking capability, all of which will allow it to challenge Nvidia,” he says.
“Further the PC market is recovering well and the development of its Edge AI chips – allowing AI to be put into PCs – is expected to be a real strength in the coming year.”
Cybersecurity stocks
Cybersecurity is also expected to continue to be a big issue in 2024 as the trend towards AI grows, which Barringer says could benefit security companies such as Darktrace and Palo Alto.
“We expect to see another step up in cyber-attacks which underpins sustained strength in the cyber software market” adds Barringer.
Capita
Contracting firm Capita appears to be on the road to recovery, with its revenues growing again thanks to restructure, which is making analysts bullish on the stock.
“Having once been valued at over £10bn in its heyday, a zero has gone missing and Capita is now valued at less than £1 billion, says Mark Wright, portfolio manager at Momentum Global Investment Management.
“It is one of the biggest contractors for the Government, managing the payment of TV licenses and recruitment for the British army. It still generates revenues of close to £3 billion at a margin that has significant upside, following a sizable restructuring of the business over the years by outgoing chief executive Jonathan Lewis.”
He highlights that revenues are now growing again, adding “If the company can earn a 5.5% margin on its revenue base and the company is more appropriately valued at 11x operating profit, then the shares could more than treble from here.”
Marston's
Wright suggests brewer and pub brand Marston’s is undervalued, highlighting that its debt levels have fallen after selling property assets and 60% of its brewery business to Carlsberg.
“The valuation it achieved on the disposal means that the remaining 40% of the brewery business that the company still own is valued at around £250m today,” he says.“
That compares to a market capitalisation for Marston’s of less than £200m. It is not inconceivable that somebody will buy that remaining stake from Marston’s in the future.”
Wright highlights that Marston’s has close to £1.8 billion of freehold property with just £1.2 billion of debt against it.
“The entire pub estate should also be able to generate operating profits of more than £170m in the near future,” he says.
“It is obvious that the shares are currently massively mispriced.”
BT
BT may not have the same technology glamour of rivals such as Netflix or Amazon, but analysts highlight that it is currently trading at around 12 times earnings and has a 6% yield so is looking cheap for investors.
“On one hand, it has cut in half the pension deficit which threatened to overwhelm them, whilst also raising the cost of capital for all the ‘Jonny Wannabes’ who wanted to build competing networks financed by almost free money,” says Julian Wheeler, of Shard Capital.
He highlights that while BT and other tech giants were historically limited on how much they could charge companies to carry traffic on their networks, this has helped brands such as Netflix and Amazon grow, an issue that is being addressed by Ofcom.
“The recent recommendations from Ofcom suggest that while they are not pushing for a repeal of the rules, they are starting to think along my lines and BT will from now on be allowed to charge more for premium services,” he adds.
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