Three firms that will lead the recovery

published 4 September 2009

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week:Simon James, partner at Gore Browne Investment Management.

Equity prices probably reached their nadir in March. Investors now seem to have thrown off fears of another Great Depression. Indeed, such low levels probably represented the end of the long bear market that started in 2000. However, two major drivers of the expansion of the last two decades are still being reversed: debt, and de-regulation. This sounds the death knell for over-valued, leveraged financial assets. But a new long-term bull-market is emerging which, in the absence of major policy error, should keep going for many years.

Nonetheless, in the coming years global demand growth will be slower than during the last decade, and will be driven less by America. This will alleviate global trade imbalances savings will be rebuilt in the West, while consumption in emerging markets will slowly take up the slack. While fiscal policies will gradually tighten, money will have to remain easy to avoid choking economic recovery. Against that backdrop, current share prices look too high, and once the obsession with green shoots' subsides, or when markets start to fear policy tightening, I would expect share prices to fall back temporarily.

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I prefer not to bet on growth stocks, and look for firms offering solid, consistent returns. An efficient balance sheet helps one with low net debt, and good cash flow. Such companies, with strong competitive positions especially in growing economies will be long-term leaders.

My first tip is Troy Asset Management (tel: 020-7499 4030). I like its Trojan Fund, managed by Sebastian Lyon. Sebastian and his colleague, Francis Brooke, have excellent track records, based on buying shares with strong financial characteristics and trying to avoid losing money!

Meanwhile, although global oil reserves continue to grow, large chunks of these reserves are difficult to extract and refine and are in some cases uneconomic at current prices. But demand keeps growing, as developing economies industrialise, so demand will exceed supply within a few years. That means the oil price, and shares linked to it, should perform strongly. My next tip is Martin Currie Global Energy (tel: 0131-229 5252), run by Duncan Goodwin and Ruairidh Stewart. They combine excellent reputations as analysts, and can access more specialist parts of the market beyond the integrated businesses of BP and Shell.

I also like social infrastructure investments in schools, hospitals and prisons. Revenues are based not upon usage but upon provision, management contracts are backed by governments, and revenue is inflation-linked. Meanwhile cash flows are relatively high, and paid regularly. Since long-term loans typically mature after 20 to 30 years, there is little concern about the abiliity of big players to finance their current operations.

So my final tip is International Public Partnerships (LSE: INPP). It has plenty of non-UK exposure, good cash availability, and a number of projects under construction. The yield is over 5% at current prices. The board says an attractive pipeline of new investment opportunities has been identified. And some investors in this area are seeking to sell assets at prices that appear attractive to a predator. International Public Partnerships is well placed to take advantage.

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