Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Julian Chillingworth, chief investment officer and manager of the Rathbone Income and Growth fund.
Worries about global growth have left the share prices of several companies languishing. In recent weeks, this anxiety has been heightened by the oil price rising to more than $144 per barrel. Both American and European stockmarkets are testing their March lows and, technically speaking, support needs to be found around those levels. Resilience to inflationary pressures and slowing consumer demand are putting corporate business models to the test. Our strategy in this kind of environment is to focus on those businesses that have strong market positions and balance sheets.
The urgent need for more power stations continues to benefit International Power (LSE:IPR). It is asset-backed, enjoys tremendous cash flows, is attractively rated, and it is an obvious beneficiary of higher electricity prices. By 2010, analysts expect its equity free cash-flow yield to come in at 11.3%, profits from operations growth at 8% a year and dividend per share growth at 13%. Funding for power and water desalination projects in the Middle East – where we expect the lion’s share of added value to come from – remains available at low spreads (i.e. it’s inexpensive) and high gearing.
Aggreko (LSE:AGK), a supplier of mobile power generation to emerging markets, is continuing to impress. The management team expects double-digit revenue growth over each of the next five years. The business enjoys high and growing return on capital employed at 27% and on a trading margin of 22%. Its customer base is well diversified by product – from utilities to oil and gas – and geography. While Aggreko has a 32% exposure to the Middle East/Africa region, its next largest exposure is to North America (27%), so it remains vulnerable in the short term to a slowdown. However, we believe that overall the business has limited exposure to the economic cycle. It enjoys few credible competitors, has a strong balance sheet and remains underpinned by widening power-capacity shortfalls. We are buyers on weakness.
We believe HSBC (LSE:HSBA) is sufficiently capitalised and diversified to withstand the broader weakness in the banking sector. Indeed, weakness provides a business like HSBC with a great opportunity to strengthen its position as a prime consolidator in the sector. Valuations appear low and we think there is significant upside on a long-term view to justify investment in such a low-risk name. Although there might be more upside in highly leveraged banks, there is also greater potential for serious downside and permanent capital loss.
Finally, Diageo (LSE:DGE) has weakened on concerns about its exposure to America, allowing us to buy it on an attractive valuation. The long-term premise to this story is simple: people drink during both good times and bad. Diageo is the world’s biggest spirits company and owns many of the world’s most popular spirits brands. Any worries about the US are offset by a growing market share in the emerging markets. For example, Guinness is becoming the beer of choice in Africa. This is a resilient, repeat-purchase business that should withstand the broader slowdown.