Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: David Marchant, head of global equities, Insight Investment
Believe it or not, 2007 was another year of positive returns for equity markets, with the FTSE World Index up 7% in capital terms. With all the bad news around you might think it felt more painful than that – and if you were heavily invested in financial shares, then it probably was.
With headlines announcing slowing economic growth in the United States and other areas of the Western world, combined with the credit crunch and falling house prices, there are good reasons to be cautious.
Yet at the same time, there are plenty of reasons to be cheerful too. Corporate profits have, to date, held up well, balance sheets are strong and valuations are modest compared with recent history as profits have risen faster than share prices.
In the financial sector, where the operating environment is likely to remain challenging, share prices are already factoring in a lot of bad news. It’s here that I have been looking for ideas as the market sells off the good in line with the bad.
For example, UBS (UBS:NYSE) is down 35% from its high in June. The largest contributor to profits for UBS is its private banking business, which has been performing well with inflows up substantially on 2006. However, the investment bank’s fixed-interest business has been embroiled in the crisis surrounding the US subprime mortgage market. I believe that the subprime crisis has overshadowed what has been a good year for the vast majority of UBS’s activities and the shares are extremely well positioned to rebound should the negative sentiment towards financial shares subside.
Elsewhere, I am excited about the prospects for Dreamworks Animation (DWA:NYSE), the maker of computer-generated animated films such as the Shrek series. The share price has been weak following the disappointment of its Bee Movie film and lower-than-expected sales of Shrek 3 DVDs, but I believe there has been too much focus on the short term and investors have yet to appreciate the opportunities for 2008. For example, the company will release Kung Fu Panda in June, featuring a cuddly, fat and lazy Panda, as well as Madagascar 2 in November, both of which have the potential to produce significant revenues.
The company also has $550m in cash on its balance sheet – a quarter of its market capitalisation – giving the shares a defensive cushion. Unlike most media and consumer-related businesses, Dreamworks has the potential to deliver even if the US economy fails to grow this year, which gives me the added comfort that I am not dependent upon what is currently a rather uncertain macroeconomic environment.
For my final pick, I am going for another area of the market where I believe the share price should not be derailed by what happens to the US housing market, the credit crunch or global growth – alternative energy. High oil prices and technological advances are making alternative energy more economic, and coupled with the global political will to increase investment in areas such as solar and wind, this is an area of secular, rather than cyclical, growth.
Here I am picking Q-Cells (QCE:GER), the German-based manufacturer of solar cells. We have owned this in our portfolios for some time now and the shares have done very well over that period. But the scale of the investment plans for solar are so strong that I believe there is upside to the market’s forecasts for profits and I am happy to run this one further.
The stocks David Marchant likes
| Stock | 12mth high | 12mth low | Now |
| UBS | $66.26 | $42.82 | $44.72 |
| Dreamworks Animation | $34.99 | $21.30 | $23.01 |
| Q-Cells | e102.85 | e34.03 | e80.05 |