Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Julian Chillingworth, chief investment officer and manager of the Rathbone Income and Growth fund.
It's been an extraordinary few weeks for finance, filled with collapses, bail-outs and takeovers. We doubt that government-sponsored initiatives will draw a line under the credit crisis, so the risk of serious capital erosion is high. That's why we are staying defensively positioned in investments that can show low levels of gearing, strong balance sheets, cash generation and visibility of earnings. No bell will ring when the market bottoms, but arguably we have another downward leg to endure as the market takes account of the burden on the US taxpayer from the bail-outs and its impact on the real economy. Markets capitulate when the economic environment is at its bleakest this is now most probable in 2009 for UK investors. Our cash levels remain high, and trading is muted. However, we are watching the following stocks for suitable entry points.
Container manufacturer Rexam (LSE:REX) is a defensive play. Its share price rose about 20% after good interim numbers. The business model is easy to grasp Rexam makes plastic and aluminium containers for a range of purposes, feeding into the relative safety of the consumer staples sector. Its pricing policy means it is also insulated from commodity price rises the costs are shouldered by the goods' producers. The European business has continued to grow strongly, as has South America, although the US is a little softer. Rexam is well positioned in the fastest-growing countries thanks to its expansionary capital spending programme. The shares yield 4.9%.
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We have bought into Scottish & Southern Energy (LSE:SSE) on a yield of 4.3%. The group has benefited from higher electricity prices and the need to secure our future energy supply; it is involved in alternatives such as wind power. The dividend has doubled since 2000, and investment opportunities will provide continued growth. We also believe that future earnings are predictable, which is particularly useful in the current environment.
Temporary-power provider Aggreko (LSE:AGK) is still a favoured industrials stock. It now benefits from a greater profile in China on the back of its work at the Beijing Olympics, and interim figures beat City hopes. Compared to last year, its return on capital employed (ROC) was up 28%, revenues were up 28%, trading profit 42%, and earnings per share (EPS) 45%. The interim dividend was also raised by 25%. The business is driven mainly by strong operations in emerging markets, which help to offset softer growth in the US and Europe. Aggreko recently bought a small Canadian operator, which will give it access to the $10bn oil-sands market. We agree with management that the imbalance between supply and demand will continue to push the business forward. We have recently taken profits but remain buyers on weakness.
HSBC (LSE:HSBA) is our preferred play in a volatile sector. It looks overvalued now, but it is well capitalised and diversified, and has so far refused to bow to its 'white knight' status, having passed on HBoS and cancelled a deal to buy Korea Exchange Bank. HSBC is now the world's largest bank by market capitalisation at $180bn; its exposure to emerging markets is reassuring, and we believe the bank will easily maintain its credit ratios relative to peers, and keep paying cash dividends. Buy on weakness.
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