John Stepek chairs our panel of experts and asks where they would and would not place their own money in today's markets.
John Stepek: Goldman Sachs reckons stockmarkets generally will keep rising for the foreseeable future. What's your take?
Anthony Cross: The problems of government and consumer debt haven't gone away. In many ways they're worse. We'll no longer be able to ignore them this year. Governments will find it harder to raise money, so government debt yields will rise. And consumers won't have the benefit of rates falling if anything, rates might nudge up. The trouble is that cyclical stocks have priced in too much of a V-shaped recovery. So genuine growth stocks with strong barriers to competition will have their day.
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Andrea Williams: Some cyclical areas do seem to have got ahead of themselves. Cost cutting has triggered some earnings growth, but now firms must deliver sales growth too. But generally we're still positive because of the amount of liquidity flowing and because equities are very cheap against bonds.
Tim Price: I'm amazed anyone can have strong convictions just now when there's so much uncertainty out there. For me, the trillion dollar problem is the bond market. In Europe you've got Portugal, Ireland, Greece and Spain. Greece is now triggering genuine debate on the future of the euro project. With that kind of tremor on the sidelines, how can anyone have certainty about asset markets this year?
John: Will inflation be a problem?
Colin McLean: I'm not sure. I don't think it will get much of a hold while we've got this consumer deleveraging going on.
Simon Webber: It's a more realistic prospect in China, which is already beginning to tighten. Companies are talking about wages going up and an amazing number of people being rehired in the export sector. You've got a bit of food price inflation and energy prices coming off low levels. And in India, inflation is already a real problem. The parts of the world that are growing strongly have a much more fundamental inflation issue that's nothing to do with money printing. Those countries will tighten monetary policy this year. How markets react will be a key question.
John: Would you avoid China?
Simon: It's not the easy growth story that it has been over the last 12 months. We'll see more market wobbles triggered by tightening. But China won't collapse this year. That risk comes later on. This year's GDP is going to be very strong.
Anthony: I do think it's hilarious how the free market is in awe of the non-free market. Capital can't be efficiently allocated there. It might not happen right away, but at some point that non-free-market allocation of capital will lead to tears. And if China does run into trouble, you could easily see the FTSE fall 20%-25%. But I'm more interested in what makes a good company or a bad one. As investors we are almost getting swamped by speculation and forgetting that if, in the long term, you back a good business with strong barriers to competition, you'll do pretty well.
John: What are you all buying now?
Colin: A lot of British industrial and engineering businesses are reasonable each-way bets. If the pound falls they'll be vulnerable as trophy assets (as we've just seen with Cadbury). I'm talking about the likes of Cookson (LSE: CKSN), IMI (LSE: IMI), and Morgan Crucible (LSE: MGCR). These businesses are dominant in their niches or at least have some price protection and look cheap when other markets and currencies have risen quite strongly. They will also share in whatever international growth there is.
Simon: Alternative energy is interesting. Take wind firms: valuations have collapsed. But take a long-term view and they will start to look attractive again in terms of the economics of the technology.
John: But how realistic is this stuff?
Simon: Wind is much more competitive than many of the other technologies out there, but it's still expensive. That's why it's really a play on higher energy prices over time, either through regulation or via higher oil prices.
John: What's the best play in the sector?
Simon: Everyone is talking about Vestas, but it's quite an easy business to get into, and there are other good firms coming along to compete such as Korean major industrials and Chinese competitors. We prefer Hansen (LSE: HSN), which makes turbine gearboxes. There are just two or three companies who make this stuff and it's technically more complex.
John: What about solar?
Simon: Solar reminds me of two industries: memory companies and dotcom firms. You and I could set up a solar panel manufacturer for a few million dollars. I quite like a German stock called Roth & Rau (Dax: R8R), which sells equipment to all these businesses that are springing up, but it's highly cyclical.
Andrea: We are starting to hunt around in more defensive areas. In big pharma, Novo Nordisk (Denmark: NOVOB) is well positioned in the diabetes market.
Anthony: If you fill a portfolio with a blend of world-beating businesses, you will pull through quite happily in the long term. Ideally, I want to see one of three things. I want strength in intellectual property, a very strong distribution network, or very high recurring income. So you hold some cyclical businesses such as retailer Carpetright (LSE: CPR) which is very strong in its backyard. You have some cheap businesses, such as pharmaceuticals, or catering giant Compass (LSE: CPG) it's quite cheap, and has a strong distribution network and high recurring income.
You can also buy a firm such as Tullett Prebon (LSE: TLPR), number two in the inter-dealer broker market, where the share price has been smashed up; or some racily rated ones, such as Rotork (LSE: ROR) in industrials. They're all very strong in their own right. Blend them together and, on a three- to five-year view, I think you will do quite well out of them.
Think also about adding smaller firms, such as Wilmington (LSE: WIL). It's the biggest legal training business in Britain. Solicitors have ongoing annual training needs and they provide that. Lawyers (property lawyers particularly) have been shedding people, but at some point that will start to even out. All in all it's a good, cash-derivative business with strong market share.
John: There's a theme here of buying solid companies that can pull through thick or thin. But if you had to take a big contrarian punt, what would it be?
Colin: ITV (LSE: ITV) still looks bombed out. Maybe it's a medium that's on the way out, but there's still a bit more life in it and it's found a chairman and a chief executive with a bit more aptitude, plus it's cut some costs.
Andrea: I'd tip publisher Reed Elsevier (LSE: REL). It's been a very poor performer. But there is new management and they are focusing again on what they do well, with a reasonable balance sheet and p/e valuation. I'd also suggest Thales (Paris: HO). It's in the defence area, but has other strings too, such as security. Again, it's got new management and is well below its historic valuation. Margins have been completely trashed and there are things it can do in terms of restructuring and cost cutting.
Simon: The consensus says to avoid the US consumer. So for a contrarian bet, try the American auto market. In Europe last year car sales were supported by all these 'cash-for-clunkers' programmes. Probably about two million annual units were sold in Europe over and above what would have been bought. But in the US the programme was tiny just a few hundred thousand extra cars. So you're going to have quite a natural cyclical recovery in American car sales this year. I don't think this is really properly understood. You can play that through US auto stocks. But perhaps the higher quality way to do it is via Japanese companies, such as Honda (JP: 7267).
Tim: If you wanted to make a contrarian point, you could argue that the UK stockmarket will do well. The FTSE isn't hugely domestically orientated. It's very global, so sterling depreciation is already helping it. The other contrarian point would be that over, say, the next 12 to 24 months, emerging markets may not deliver the goods everyone expects. There's no historic evidence I know of to show that fast-growing markets necessarily deliver rapidly growing stockmarket performance.
John: How about gold?
Colin: Given where gold is up to, you have to question if it'll run on. But considering the rate at which US dollars have been printed, it will be seen as a store of real value. And there are questions across the world about what currency to use to price commodities and the other things emerging markets are producing. It's rare for reserve currencies to remain reserve currencies. We found this out in Britain after the war although it took Suez to finally crack the pound. But I would be surprised if even in five years' time the dollar is still the reserve currency.
Simon: If we miraculously deal with over-leveraging and money printing and fiscal deficits, gold will be a disaster
Tim: All trivial concerns!
Simon: but unless that happens, gold is a great hedge as a store of real value.
Tim: We could see gold fall, perhaps quite dramatically this year, particularly if we get a rally in the dollar. But on any fall-back I'll be buying quite aggressively. I've started using a closed-ended fund called Altus Resource Capital (LSE: ARCL), which is effectively an investment trust that invests in junior gold miners. If gold remains where it is now, or trades higher that that which in the long runI think is almost inevitable then junior gold miners will probably give you a higher return (albeit with higher volatility).
John: So what about your single best tips?
Simon: One long-term trend I'm focused on is emission reduction in cars, which leads you into electrification. The short-term challenge is the cost. Batteries make electric cars uneconomic. Yet that will change over four or five years, especially if oil prices rise. French group Saft (Paris: SAFT) has a long history of making batteries for industrial and military purposes. It has set up a joint venture with Johnson Controls, a big US lead acid battery business, to make lithium-ion rechargeable batteries. They were given about $400m of taxpayers' money to subsidise plant, research and development. They have contracts with Ford, Daimler and BMW for early-stage hybrid and electric vehicles. The stock trades on a reasonable p/e of 15 or 16.
Andrea: I like Italian oil services group Saipem (Milan: SPM). It has a very strong balance sheet and has put in a lot of capital expenditure in recent years, which will bear fruit from 2011 onwards. So while it looks expensive now, I think the p/e will come down as earnings growth picks up.
Anthony: I'll go for Next Fifteen (LSE: NFC). It's a public relations business with a very strong international network that serves some of the big technology firms. You're seeing two things in PR just now. You still see very high levels of recurring income from retainers, so they start each year with a high level of forward visibility. But you're also seeing firms struggling to understand social media. Next Fifteen has strong expertise in social media and can help firms protect their brands and promote themselves in an increasingly fragmented media world. It's cheap on six or seven times earnings. I can see the share price going 50% higher it had two approaches from rivals in the summer.
Colin: African oil and gas explorer Afren (LSE: AFR) has quite good political connections, in Nigeria in particular. It also has a pretty strong drilling programme it's already had one good update this month. The share price is up from its lows of 2009 and it raised some money last year. We see another 30% of upside that isn't too dependent on the oil price, but is probably driven more by drilling. It may also be benefiting from some of the mergers and acquisitions we see coming into this sector.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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