A professional investor tells MoneyWeek where he’d put his money now. This week: Hugh Yarrow, co-manager, Rathbone High Income Fund
After a sharp sell-off at the start of March, equity markets have rebounded, with takeover activity offsetting some bad news on the US economy. Several areas of the market look fully valued just now, so we’re being prudent about investing new money. We’re buying stocks that are at least partly insulated from economic conditions, particularly those where structural growth over the next few years is evident.
Rexam (REX) is the world’s top maker of cans for the drinks industry. Demand tends to be quite stable across the economic cycle – in a downturn, people still drink and also stay in more, buying canned drinks rather than visiting bars or cafes. The group’s shares have been unloved in the last year after high aluminium prices bit into margins, but this is a short-term issue. In the long term, Rexam is investing in projects that will drive earnings and dividend growth. One example is its investment in a new plant in Russia, which will produce one-litre beer cans. This short-term price weakness is a chance to buy into a high-quality business at an attractive price. The shares yield 3.8%.
International Power (IPR) has strong visible earnings growth driven by a strong structural story – the demand for investment in electricity generation versus insufficient capacity. This supply shortage means the group is benefiting from the subsequent rise in power prices. It has a global asset portfolio, the most interesting of which are desalination plants and power-generation plants in the Middle East. The company offsets electricity price risk by building and operating assets on long-term contracts with a guaranteed return stipulated. Once building is complete, these projects are very cash-generative. Nearly 40% of its business is now conducted on this basis, so management can be confident about hiking dividends – last year, the dividend rose 75%.
Man Group (EMG) is a play on investors’ growing appetite for absolute-return products. The company plans to float its brokerage business, Man Financial – a US-based derivatives broker that we expect to attract high levels of interest. There is significant and, as yet, unrealised value to be unlocked here. The spin-off is also expected to release a substantial amount of regulatory capital that may be returned to shareholders. The asset management business is already highly cash-generative and management has indicated that there may be a dividend rise once the deal is complete. Man’s share price can suffer mark-downs, along with more generalist financial firms, during bouts of market weakness. Yet its products have an historically low correlation with equity markets, so broader weakness is not necessarily bad for the group. We use these periods to top up our holding.
Finally, Austria’s Zumtobel (GR:T97) is the European leader in lighting, illuminating Wembley Stadium and other prominent structures. The group benefits from a highly trained technical sales team who sell the products based on their quality and the company’s ability to put together bespoke products. There’s a lot of structural growth supporting the market right now – energy-efficiency requirements; growing building regulations that mean higher spending on lighting as a percentage of overall construction; and a fast-growing market for LED lighting. Zumtobel is also a consolidator in a very fragmented market and is well-positioned to benefit from emerging market growth, particularly in Asia.
The safe stocks Hugh Yarrow likes
12mth high 12mth low Now
Rexam 608.5p 456.5p 554.5p
International Power 428p 261p 417p
Man Group 603p 354p 567p
Zumtobel e27.68 e15.05 e27.00