A professional investor tells MoneyWeek where he'd put his money now. This week: Alan Hardy, head of investments, Lloyds TSB Private Banking.
After more than three years of troubled waters, 2003 saw UK equities finally buoyed by renewed confidence in the British economy. It was a very good year for small company stocks - often a good indicator of the course the economy is likely to steer next. With that in mind, it makes sense to me that 2004 will see the domestic stockmarket continuing to ride high. This year, however, I think that big blue- chip stocks will take the helm as institutional investors shift out of bonds and into equities. The first to benefit from this change are usually big, marketable blue chips, mainly because they offer good liquidity and have plenty of shares available to buy. Further good news for those looking to invest in blue-chip firms is that many are still well priced even in the wake of last year's rises. Here are six that I expect to perform well as the economy picks up.
In retailing, which should benefit if consumer expenditure remains strong, Next is my favourite. It is still gaining market share in the high street, and is also benefiting from the move to larger, more efficient stores out of town. The Next Directory is seeing double-digit sales growth, making it a useful second sales channel for the group. But just as importantly for shareholders, it continues to operate its successful share buy-back policy. We expect to see further upgrades to earnings forecasts throughout 2004, which means the shares still offer value.
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Whitbread is another I think will perform well this year as the leisure industry makes the most of renewed consumer confidence. Following the sale of its low-growth brewing operation and its tenanted pub estate, Whitbread is returning cash to shareholders. It is now focusing its business strategy on hotels, pub restaurants and health clubs, where demand remains strong. Given that most of its revenue is in the UK, it should not be adversely effected by the strength of the pound.
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Support services such as caterers are also expected to figure prominently in investors' hit lists in 2004, and Compass, which offers international contract and concession catering services, is a good bet. With outsourcing and consolidation trends ongoing, the group is confident of delivering continued margin improvement and strong cash generation and, with a focus on organic growth, it could be a good prospect for the year ahead.
The engineering sector may also perform well this year as manufacturing output picks up, and Cookson Group, a specialist manufacturer and supplier of industrial materials and equipment, should benefit from increased demand for PCs and mobile handsets. Its shares are also trading at a significant discount to fair value.
Life insurance companies tend to invest their long-term funds in equities and therefore should also see a return to favour in any bull-market run. I recommend Old Mutual, which is currently lowly rated within the sector and offers above average recovery potential. The firm also has a large asset management arm that should generate higher income as the value of its share portfolio increases.
My final selection will be steering a course to port - Associated British Ports to be exact. With its high profit margins and strong cash flow, ABP should be a safe haven. In addition, a number of new port developments are likely to generate investor interest, thus pushing up the value of this stock in 2004.
When planning an investment portfolio, it is always important not to leave yourself too exposed to any one company or sector, but given how good things look for the UK economy at the moment, focusing on Britain in 2004 would be no bad thing.
