Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: William Meadon, manager, JPMorgan Claverhouse investment trust.
As the UK economy continues to strengthen, it is encouraging to hear just how upbeat the managements of many of our companies are. Corporate balance sheets are strong, and dividend flows remain robust. The stockmarket has, however, anticipated much of this good news and so the valuation of equities is no longer in the bargain-basement category. However, equities continue to look attractive to us on a medium-term view and we are still finding many interesting UK opportunities.
For example, easyJet (LSE: EZJ) has been a top-performing stock. This low-cost airline has taken advantage of the troubles of many of its European competitors and has achieved strong revenue and profits growth by attracting both business customers and holidaymakers. Its strategy of introducing allocated seating has been highly successful in boosting profits. The company has recently announced another special dividend for its shareholders.
Another winning investment has been broadcaster ITV (LSE: ITV), which saw its share price rise by more than 90% during 2013, as a result of a dramatic improvement in both profitability and cash generation, which resulted in a special dividend payment of 4p being made to shareholders. Telecoms giant BT (LSE: BT.A) has also performed very well, reporting very strong profit growth and cash generation, while also launching its new sports channel and enhanced broadband offering in order to attract even more customers.
Electrical retailer Dixons (LSE: DXNS) also had a good 2013. The firm did well both operationally and strategically, with its core UK business gaining market share as well as delivering strong profit growth. Dixons has announced that it is now in merger talks with telecoms retailer Carphone Warehouse to form an electrical high-street powerhouse.
Our favoured life-insurance stocks, Legal & General (LSE: LGEN) and Prudential (LSE: PRU), have performed well. These financial stocks benefited from the rising equity market, but more importantly, a focus on cash generation over recent years has enabled both companies to announce strong dividend growth in 2013, in excess of 15% for each of them. We are also encouraged by the turnaround new management has started at Aviva (LSE: AV).
Looking at the broader picture, UK equities are significantly under-owned: many pension funds sold substantial holdings years ago. This creates an opportunity for an investment trust like ours whose investors are prepared to look beyond the short-term. We entered 2014 with gearing (borrowing money to invest) at around 17% as we continue to find a number of investments where we think the prospective return will exceed the cost of borrowing.
Returns this year are, however, unlikely to be as handsome as in 2013. Growing concerns about the timing of short-term interest-rate rises and the slowdown in emerging-market growth are just two matters likely to make investors more cautious and returns more volatile. So we will need to tread carefully and invest only in the strongest companies. But from here, we think UK stocks will provide medium-term investors who are prepared to tolerate some volatility in the price of their investments, with attractive real (after-inflation) returns.