Four stocks for a resilient portfolio

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Paul Abberley, chief investment officer, Charles Stanley.

For some time equity markets have been riding on an inflatable cushion, courtesy of the central banks and quantitative easing (QE). However, the central banks have now warned that they are about to start letting out some air.

So, the key question now is whether the global economy can keep growing as QE is wound down. If the global economy does continue to grow, and grow on a sustainable basis, we could get the long-term increase in corporate profits we need if stock markets are going to rise any further.

A bull market underpinned by sustainable profit growth is obviously more dependable than one fuelled by QE. But the economic outlook is finely balanced. So, the challenge for investors is to build portfolios that will benefit if markets rise without being unduly exposed should economic growth falter.

Beverages company Diageo (LSE: DGE) is a strong candidate for inclusion in such a portfolio. Admittedly, recent results have been weak, with lower sales and profits. However, Diageo’s balance sheet remains strong, and it has an unrivalled portfolio of premium spirits and beer brands.

Diageo remains poised to benefit from the continued growth of the middle class in the developing world. While a cheaper pound would help Diageo’s results in the near term, this is very much a long-term investment opportunity. On our figures, a price/earnings (p/e) ratio of 17.5 for 2015 is not unduly demanding.

The stockmarket in Japan presents a second opportunity. While prime minister Abe’s third arrow of structural reform is falling short, the big picture is nevertheless one of renewed determination to escape the somnambulant influence of borderline deflation.

However, if growth does falter once more, the corporate sector has considerable experience of grinding out results against such a backdrop.

While Japan offers lots of opportunities for active stockpickers, in this case I’ve chosen a passive exchange-traded fund (ETF), the iShares MSCI Japan GBP Hedged ETF (LSE: IJPH). In other words, I’ve gone for a fund that aims to replicate the performance of the MSCI Japan stockmarket index.

I’ve also gone for one that’s hedged against a declining yen, due to the fact that the Japanese authorities are trying to drive down the value of the yen – albeit only with partial success so far. In a portfolio dominated by UK stocks, this ETF might also afford a degree of diversification.

My third selection is Barclays (LSE: BARC). There’s an axiom that an investor should never seek to catch a falling knife. But picking one off the floor can be quite smart. That’s where I think Barclays is right now.

With earnings in the global banking sector so variable nowadays, analysts have focused more on price-to-book as a measure of valuation. Our conservative assumptions still leave Barclays’ ratio at 77%, which is low for the sector.

Meanwhile, the bank’s Project Transform restructuring initiative seems to be making progress. Granted, there’s plenty of uncertainty here.

All banks are vulnerable at the moment to litigation risk related to previous malpractice, and then there’s the continuing public policy debate around the role of banks in the economy and society more broadly.

Nevertheless, financial services remain central to a modern market economy and sooner or later we will re-establish some normality. At current levels, Barclays’ stock can be a long-term beneficiary from that return to a more conventional economy.


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