Share tips: five defensive growth plays

Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Hugh Yarrow, co-manager, Rathbone High Income Fund

There is an interesting tension in global markets. Inflationary pressures and robust global growth suggest that risky assets and cyclical growth stocks should continue to perform well. This is also why interest rates are rising in Europe and income-producing assets are generally underperforming. However, these tighter monetary conditions may turn this outlook on its head. At some point, deteriorating credit conditions will begin to hit risk appetite and affect growth. So we are focusing on areas that are well supported, thanks to high visibility in demand. 

We’ve been adding to defensive growth plays, including Tesco (TSCO), which looks cheap. It is supported by an active property programme that is releasing value, and provides a good underpinning for the firm. The UK business is doing well, supported by strong food-price inflation; medium-term prospects for the non-food business also look good. But we continue to see the strongest growth from the overseas business, particularly the US, where returns on investment could reach 15%-20%. We bought Tesco on a 3% yield – it now yields 2.1%, but we’re happy to hold and benefit from dividend growth as it comes through. 

Still on the defensive theme, we’ve recently raised our Vodafone (VOD) holding. After over-investment at the start of the decade, prospects for the European mobile market are starting to look much better. As devices such as the Blackberry and iPhone grow in popularity, mobiles are being used for downloading data. Add to that the firm’s stakes in rapidly growing businesses in both the US and India, and Vodafone looks well supported on an estimated yield of just over 4.5%.

In May, we started a holding in Aggreko (AGK), a global provider of temporary power units. We are particularly interested in the unit that supplies power stations to developing countries. Growth in this area is very strong due to rising electricity demand and under-investment in power in many such nations. A recent trading update was positive, and the group has also been named the exclusive supplier to the Beijing 2008 Olympic Games. 

While UK consumer-facing stocks are having a tough time, we are staying focused on high-quality businesses, underpinned by long-term growth stories and strong fundamentals. One such stock is Assura (AGR). The group leases GP surgeries and clinics to the NHS providing a growing, government-backed rental stream. Following a government-led initiative to shift some of the responsibility from hospitals to the primary-care arena, Assura is also working with GPs to return certain healthcare services to the local community. The potential for this business looks very interesting.

Another area of the global economy that looks well supported is the mining and oil equipment industry. Weir Group (WEIR) is a well-run business that offers a focused exposure to this market. The group has nearly one third of the market for mill-circuit pumps (heavy duty equipment to remove ore and waste from the mine face). The business is also very well positioned in both oil and power generation markets. Investment in these markets will continue for several years as resource companies use their strong balance sheets to improve existing assets and open new ones.

The stocks Hugh Yarrow likes

Stock, 12mth high, 12mth low, Now   

Tesco, 473.75p, 345.25p, 425p
Vodafone, 168p, 110p, 161p
Aggreko 600.5p, 258.5p, 579.5p
Assura, 249.5p, 154p, 195p
Weir Group, 779p, 384.75p, 766.5p


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