There have been sizeable gains in stockmarkets since last year’s Covid-19-induced lows, but there remains ample opportunity to make handsome returns as economic activity rebounds. Yes, some of the low-hanging fruit has been picked (and much of it from the floor), but as a long-term investor I’m thinking beyond the next year, compounding returns into the future.
British equities are benefiting from a double tailwind: a more positive post-Brexit outlook and the strong performance of cyclical sectors since the discovery of the vaccines heralded an economic recovery. Factor in the UK’s successful vaccination programme and our prospects look as good as they have for some time.
A different kind of kettle chip
Strix Group (Aim: KETL) might not be a household name, but you are likely to be using its technology. The company’s ticker provides a clue: you will find its thermostats in kettles worldwide and this level of market dominance, coupled with strong intellectual property, provides a healthy return on capital, a key gauge of profitability.
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Beyond kettles and a largely untapped rice-cooker market in China, the company is diversifying into newer areas, such as water-filtration products and health and wellness appliances, including baby-bottle preparation machines in the form of a licence with baby-product maker Tommee Tippee. The company is lowly-geared and looking to double revenues over the next five years, leveraging its intellectual property. It even managed to raise the dividend in 2020 in line with its progressive dividend policy. As a good-quality business opening up new areas of growth it looks decent value at current levels.
The best pre-IPO opportunities
Chrysalis Investments Ltd (LSE: CHRY) is a closed-end investment company comprising a portfolio of 11 mostly late-stage private-equity investments. The company invests in proven business models with prospects for high future growth, providing capital to grow these already successful businesses into market leaders.
Exit may come through a trade sale to another private buyer but the more likely route is through the initial public offering (IPO) path to market, as demonstrated by The Hut Group, a highly scalable e-commerce technology platform. It successfully went public in the autumn of last year. Chrysalis’s other investments include fintechs Starling Bank and Klarna as well as Graphcore, which makes chips for the artificial intelligence sector. Chrysalis is not so much one unicorn as a herd.
Value in UK value
TM RWC UK Equity Income is an open-ended fund that invests mostly in UK-listed companies, many of which are exposed to markets outside of the UK. The reason for including this fund is that it gives investors diversified exposure to the cyclical reflation trade that started in late 2020.
It also sits well alongside widely owned growth strategies as the managers adopt a disciplined-value philosophy, an investment style that has been out of favour in recent years – as British stocks in general have been among international investors. The portfolio has performed well since “vaccine Monday” last November, but episodes of cyclical uplift can run for several years and with nearly a decade of catch-up to go, UK value could yield meaningful gains in the coming years.
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