A professional investor tells MoneyWeek where he’d put his money now. This week: Gary Dugan, head of research and investment strategy at Barclays.
Maintaining a long-term perspective isn’t always easy for investors. But it is important, especially given current geopolitical instability and the debate about the future path of interest rates.
Recent history tells us that the time to worry about future returns is when there is the threat of structural change. However, for the time being we see only a modest risk of a fundamental shift towards a more inflationary world.
What’s more likely is that the world is following the path of a normal economic cycle. Of course, that doesn’t tell us how high inflation will rise in the current cycle. Inflation keeps coming in stronger than expected and central banks have to play catch-up, as the recent rise in UK interest
rates showed.
Some commentators have raised the spectre of stagflation (where inflation takes off while economic growth is flat or falling). The market is pricing in the possibility of such a scenario, one sign being the currently undervalued equity markets.
But we’re sceptical that stagflation can be sustained in a world of globalised production and deregulated labour markets. Even with a US slowdown, we think there’s enough momentum in the global economy to maintain reasonable growth into 2007.
But equity markets will make more substantial progress only when central banks are shown to be clearly in control. There needs to be the prospect of rate cuts to stimulate economic growth. As we think this scenario is several quarters away, we are emphasising caution in portfolios, favouring a defensive bias through markets such as the US and the UK.
Oil giant BP (BP) is among our favoured stocks. The company has been in the news for the wrong reasons recently, with the partial shutdown of its Prudhoe Bay oilfield in Alaska. But we think the market overreacted and that the financial impact will be small.
BP has one of the best medium-term fundamental outlooks in the oil sector. It boasts high-margin production growth and an attractive capital-management programme, including significant share buybacks. The shares trade on a justified premium and we maintain our positive stance.
One of our preferred banking stocks is HBOS (HBOS), whose attractions include its diversified business model – from retail banking to its excellent insurance and investment business. Concerns about bad debts have weighed on the share price. Yet while unsecured bad debts will continue to deteriorate, they represent just 8% of the loan book.
We think HBOS offers plenty of potential growth and value. The strong performances of many of its businesses are not reflected in its share price, which represents a great buying opportunity.
We also like property investment group British Land (BLND). It recently posted a strong set of first-quarter results, with the best valuation growth coming from its City and West End offices. One of the key positives for British Land is its large exposure to the central London office market, which accounts for around 35% of its portfolio. That’s the market where we expect the biggest increase in property valuations this year.
The company has repositioned itself, is cleaning up its balance sheet and its development pipeline is strong. We see good potential for the share price.