Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Martin Todd, investment director, SWIP UK equities team.
Many investors would be forgiven for wanting to take an extra week’s summer holiday this year, given the uncertainty in the market. Economic data have generally been poor, while currencies and commodities have been volatile. News headlines have hardly lightened the mood, with talk of budget cuts, double-dip recessions and sovereign-debt crises. It’s no surprise some hedge funds have opted to sit on the sidelines.
And while we are not in the double-dip camp, we do expect revenue growth to become progressively more difficult. On that basis, we retain a preference for growth stocks over cyclicals, and global or emerging-market exposure over domestic exposure.
One byproduct of a tougher revenue environment is that firms have to spend more to grow. But this is music to the ears of WPP (LSE: WPP): as the world’s largest marketing company it’s perfectly placed to benefit.
Blue-chip firms such as Procter & Gamble, Unilever and Reckitt Benckiser are all aggressively increasing their promotional spending. In developed markets these firms need to spend more to retain their customers, and in emerging markets they need to spend more to win them. Whether it is television advertising, a larger online presence, or better market research about customers, WPP is a firm that can deliver. Lead by Sir Martin Sorrell, WPP was quick to identify the potential in emerging markets, which now account for 28% of earnings. That includes market leading positions in Brazil, Russia, India and China.
In the recent market rally, reliable growth stocks have been somewhat overlooked in favour of cyclicals. AstraZeneca (LSE: AZN) has been one such stock, and thus trades on a very undemanding valuation. Investor concerns have focused on a number of its key patents that are due to expire after 2012. Earnings estimates, though, have been increasing in the wake of a number of encouraging developments. The company posted strong second-quarter results and doubled its share buyback programme.
It also won endorsement from a drugs advisory committee in the US for its blood-thinning drug, Brilinta. Like WPP, AstraZeneca has healthy exposure to emerging markets – one of the key drivers of its recent strong performance. This, and the cash-generative nature of its business, makes for an attractive combination, which is not yet reflected in the share price.
In the aftermath of the financial crisis the world is split – emerging economies are delivering high single-digit GDP growth, while developed economies fret over a double-dip recession.
One of the beneficiaries of high emerging-market growth is the energy industry, notably power companies in India and China, where there is a structural energy shortage. Essar Energy (LSE: ESSR), which listed on the London Stock Exchange during the first half of 2010, is a major player in Indian electricity, gas and oil markets. It has a clear strategy that we believe will deliver impressive growth rates against the backdrop of rapidly liberalising energy markets. Essar retains a cost advantage relative to competitors. As India industrialises, the growth outlook is promising.
So while the debate about the state of the global economy looks set to rumble on, these are three stocks that we believe can deliver against a range of economic outcomes. All are well worth looking into on your return from holiday.