Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Chris White, senior investment manager, Premier Fund Managers.
The economic outlook for 2012 is pretty unappealing on a 12- to 18-month view. So what should investors do? The answer is to keep it simple. The inflationary backdrop makes cash and bond returns look unattractive. However, equities look like relatively sound investments at least they are able to provide some inflation-protection. This year will be one in which Murphy's Law applies to companies and their share prices. That is to say, if you think it could go wrong, it probably will. In this environment, defensive equities look the most attractive as their earnings are fairly reliable.
I've selected three shares I think should be able to withstand any big economic shocks next year and also provide good total returns for investors, along with a reasonable level of income. High-quality blue-chip' equities are a good starting point as many of these provide a generous level of dividend income, which is well covered by earnings and cash flow. My chosen firms are large, high-quality, cash-generative, have access to capital and have proved their businesses are scalable over time.
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The first stock that I recommend for 2012 is Vodafone (LSE: VOD). This is a high-quality mobile telecoms company. It offers a dividend yield of 5.6% and, better still, this is well covered by profits. Over the past few years, the group has been shuffling its suite of assets and has positioned itself better for long-term growth in emerging markets. While profits growth could be modest, it should also be fairly reliable. That suggests the shares should provide a good total return in 2012.
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My second recommendation is Tesco (LSE: TSCO). The British consumer has been under the cosh in 2012 and living standards have declined sharply in the face of rising inflation and falling real wages. But 2012 could see a modest improvement in the outlook as inflation falls back and we pass through the anniversary of the VAT rise. Tesco struggled to make progress in Britain during 2011, but there are signs that the mega-retailer is now getting back on the front foot. Yet the shares trade at roughly the same price as they did in 2007. So after years of de-rating, Tesco now trades on a very low valuation.
We hope to see losses at Tesco's US subsidiary reduced during the course of the year and a continuation of the strong performance in international markets. The company is fortunate to be very cash-generative. Having completed a heavy investment plan it is now focusing on return on capital over the next few years. A period of improving returns usually corresponds with strong share-price performance for food retailers, as it did for Tesco between 1996 and 1998.
The most cyclical stock of the three is advertising agency WPP (LSE: WPP), run by Sir Martin Sorrell. This year will see agencies such as WPP benefit from a combination of the Olympics, European and world football tournaments and the US presidential election. This should underpin profit estimates. WPP gets 30% of its revenues from emerging markets, many of which are still growing. The shares were hit hard by the European crisis in August and have only so far recovered some of the ground they lost. This drubbing seems too harsh and has made the shares unusually cheap, with a 4% estimated dividend yield for 2012.
