Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Martin Todd, investment director, UK equities, Scottish Widows Investment Partnership.
As the market pauses for breath following the sharp rally that began in early March, now is a good time for investors to take stock and review their positioning for the coming months. The way ahead is far from clear.
On the one hand, a number of indicators suggest that at the very least the rate of economic decline is slowing. The combination of monetary and fiscal stimulus around the globe seems to be succeeding in kick-starting the economy. But the market remains unsure whether this will turn out to be a 'W', 'V' or even 'L'-shaped recovery. So our preference is for a more balanced portfolio which should prosper in a range of outcomes.
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One London-listed stock that needn't be concerned by the UK's economic outlook is Great Eastern Energy Corporation (LSE: GEEC). Despite uncertainties about the short-term outlook for the global economy, the case for structural growth in energy demand within emerging markets remains intact.
Great Eastern is perfectly placed to benefit. It controls exploration and production licences to extract coal bed methane in West Bengal, India. It has a deal in place with Indian Oil Corporation (IOC) to supply compressed natural gas (CNG), produced from its coal bed methane blocks, to power vehicles, and is well advanced in developing a pipeline network to supply direct to industrial customers. The cost advantage the group has versus existing suppliers represents a sustainable competitive advantage. When coupled with the structural growth story within India, Great Eastern has a very exciting future.
There can be no doubting the perilous state of the UK housing market. Mortgage approvals have fallen to record lows, accompanied by dramatic falls in house prices. So our choice of UK housebuilder Berkeley Group (LSE: BKG) may seem strange.
But the group has a number of competitive advantages over its peers. The £50m of fresh capital raised in February positions the company with over £300m of cash. Management is keen to use these funds to take advantage of distressed land sales, bolstering what is already an unrivalled land bank. Land write-downs are also unlikely, given the company's conservative accounting policies.
The recent share price weakness, driven by the forced sale of stock by the group's largest shareholder, provides an attractive entry point. Longer term, Berkeley is well placed to benefit from the strong fundamentals underlying the UK housing market.
In contrast to the more cyclical Berkeley, BAE Systems (LSE: BA) should be relatively immune to the economic cycle. Shares in the third-largest global defence firm have underperformed sharply during the recent rally, leaving it trading on an attractive valuation, particularly when compared with US peers.
Sceptics fear that the scale of the budget deficit in the UK and US will result in drastic defence spending cuts, particularly given reduced involvement in Iraq. Investors should be aware though that many of the areas within the US defence budget (to which BAE is heavily exposed), continue to show healthy growth. Internationally, the company's long-standing relationship with the Saudi government will be a significant source of growth over coming years. As a source of a stable earnings at an attractive valuation, and with a good dividend yield, BAE Systems is worthy of inclusion in any balanced portfolio.
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The stocksMartin Toddlikes
| Great Eastern Energy | 302.5p | 190p | 302.5p |
| Berkeley | 1,071p | 577p | 810.5p |
| BAE Systems | 492p | 294p | 341.75p |
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