We see light at the end of the tunnel following the Covid-19 pandemic. While there are still significant hurdles to face before “normal” life can resume, we are optimistic that the long-term outlook for the UK is one of sustained growth.In the short term, growth may be uneven as markets across the globe begin to find their feet. British stocks are well placed to benefit from this wider recovery, although residual Brexit headwinds remain.
We believe that many of the key drivers and themes that have accelerated over the past year, such as online retail and home improvement, will remain in place. We therefore remain focused on the long term, seeking out companies with strong balance sheets, consistent cash generation and resilient business models.
Housebuilders have solid foundations
We have been long-term advocates of housebuilders, with companies such as Persimmon (LSE: PSN), Barratt Developments (LSE: BDEV) and Bellway(LSE: BWY) all forming part of our portfolio. While many companies were forced to suspend dividend payouts this year, housebuilders, who were able to restart operations in April and May, got back on track quickly. Persimmon, for example, was one of the first housebuilders back in production and managed to provide a special dividend to investors over the summer.
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Many housebuilders entered this crisis with strong balance sheets. This is largely down to good management teams that have weathered previous market downturns and, as a result, emerged stronger. Many of these companies remain compelling, trading on single-digit multiples based on their earnings forecasts for next year, and should be able to maintain their dividends in the next year.
First among financials
When it comes to the financial sector, life assurers often stand out for their higher-quality loans and reduced exposure to interest-rate volatility. Banks tend to have greater exposure to consumer and small business-lending, which is often the first portion of the credit market to see rising default levels during recessionary periods.
Since the onset of the pandemic, many of Britain’s largest banks have cancelled their dividends due to regulatory pressures. On the other hand, Legal & General (LSE: LGEN), Phoenix Group (LSE: PHNX) and Prudential (LSE: PRU) have kept paying dividends – a welcome development in a world where yield is scarce.
A retailer with roaring online sales
The retail sector faces a number of challenges, but we see opportunities among operators with a strong online presence and those catering to the growing theme of home improvement. Bricks-and-mortar retailer Dunelm (LSE: DNLM) was already taking market share before lockdown.
Others in the sector are struggling to keep up in terms of product offering, technology and marketing spend. To survive and thrive as a retailer, data and technology are key. The company’s newly upgraded website has benefited from significant investment, and online sales are up by 100% year-on-year. Dunelm’s sharp focus on value for money also resonates with its customers and, as the economic backdrop remains uncertain, it should further benefit the company.
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