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Three market leaders to ride out the storm

With lingering concerns about this year's market rally, professional investor Paras Anad prefers to focus on high-quality companies with visible pricing power. Here, he picks three market leaders that should take market share during the downturn and then deliver value when the upturn arrives.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Paras Anand, manager of the F&C European Growth and Income Fund.

Many markets, including equities and bonds, have enjoyed continued gains. Central banks have made it clear they intend to keep monetary conditions relatively easy for the foreseeable future. Further support for share prices has come from companies generating higher than expected profits. That's been driven by firms keeping control over costs and by decent demand from the faster-growing markets.

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Concerns linger over both the grounds for, and sustainability of, this year's rally particularly in the equity market. That said, I expect headline economic growth figures to deliver some pleasant surprises as we move into 2010. That does not mean that macroeconomic risk has disappeared entirely, but I believe bonds are at greater risk than equities. That's especially true if we see higher inflation over the next five years than we've seen over the last five. So for the moment, my focus is on high-quality companies with visible pricing power.

With this in mind, I have selected three stocks that fit with my views on how the business environment will develop over the next three to five years. All are strong market leaders that should take market share during this downturn and then deliver value when the upturn arrives.

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The first stock is Akzo Nobel (Amsterdam: AKZA), the world-leader in the production of decorative and industrial coatings. It is an attractive business, thanks to the fairly low capital intensity of its production process. Following a major corporate restructuring, which involved selling the healthcare division and combining the existing coatings businesses with ICI's, the firm controls a large number of the top brands in the market.

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While there may be some pressure over the medium term from low housing turnover, consumer spending on repairs, maintenance and improvements tends not to be as cyclical. Akzo Nobel will do well as homeowners focus on refurbishing their home rather than moving. And there is more likely upside to come from the synergies and cost savings that should flow from the integration of ICI. The yield is 3.85%.

My second pick is Assa Abloy (STO: ASSA-B), the world's leading producer of locks and other security devices for residential, institutional and commercial buildings. Despite tough conditions in the construction industry across most developed global markets, the company has good exposure to infrastructure and housing in emerging markets. It's also at the cutting edge of developments within security technology for more mature markets as security requirements steadily rise. A great market position gives the group strong pricing power, enabling it to generate good cash flow and acquire market share in a challenging business environment. The yield is 2.73%.

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My final stock is Unilever (LSE: ULVR). Looking at the company's recent disposals and acquisitions, it seems to be getting better at capital allocation. Furthermore, it has an enviable exposure to developing and emerging market consumers, which will underpin growth for many years. The group seems to be appealing to a wider customer base while maintaining a strong grip on cash flow and continuing to refocus the business. The shares offer great long-term value and a 4.2% yield.

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The stocks Paras Anand likes

12-month high12-month lowNow
Akzo Nobel€47.78€22.39€43.94
Assa AbloySEK134.30SEK69.00SEK132.20
Unilever1,899p1,226p1,831p
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