Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Ben Ritchie, deputy manager, Dunedin Income Growth Investment Trust.
The past year has been a strange one for UK equities. After a bumper 2013, the stockmarket is down so far this year. Yet ironically some 70% of the stocks in the FTSE 100 have actually produced positive total returns (ie, including dividend payouts).
But what has particularly dragged on the UK market has been its significant weighting to commodities, alongside some notable problem stocks, such as Tesco.
Despite some signs of optimism in the domestic economy and in the US, the big picture is likely to remain challenging for companies next year. Europe and Japan have fallen back into recession, while growth in emerging markets has slowed.
Stockpickers will need to rely on fundamental research to identify firms with an attractive long-term business model that can weather short-term headwinds. The falls in the share prices of some blue chips also offer opportunities to invest in good-quality companies at cheaper levels.
Prudential (LSE: PRU) is one company that has battled through the headwinds of 2014. It benefits from strong demographic trends that are driving demand for its retirement, savings, and life and medical insurance products in both the US and across Asia.
It has a formidable market position in Asia, with powerful distribution capabilities that make it well placed to benefit from growth in GDP per head. Prudential is supported by the asset-management capabilities of M&G, which has seen strong net inflows in recent years (£5.9bn in the year to date). It has a strong balance sheet with a regulatory surplus of £4.1bn.
Standard Chartered (LSE: STAN) is beleaguered and unloved. It was once the poster boy of UK banks – it pulled through the financial crisis and troubles in the eurozone with barely a scratch. Yet now it’s a veritable pariah.
Worries over emerging-market economies, discussions about management succession, capital concerns and worries over credit quality have all combined to wipe the smile off the face of the poster boy.
Yet we still believe that the bank has a tremendous franchise, a powerful banking network in the fastest-growing economies in the world, and it’s available to the brave investor at 0.7 times book value, a valuation that hasn’t been since the depths of the Asian crisis.
It will still face difficulties – a dividend cut or capital raising are both possibilities – but the investor with a longer-term perspective may well stand to prosper from Standard Chartered’s current lack of popularity.
Weir Group’s (LSE: WEIR) share price has fallen by close to 40% since September, broadly mirroring the collapse in the oil price.
Yet we remain big fans of this pump manufacturing and servicing company, which enjoys high profit margins and plenty of recurring income selling spare parts and services to its fairly captive customer base – and not just in oil markets. Weir has undoubtedly prospered from the boom in shale oil and this may be about to end.
However, it is fundamentally driven by resource production rather than commodity prices and, with its very profitable aftermarket operations and its strong balance sheet, we once again believe that, for the courageous investor prepared to take a medium-term view, Weir may present an attractive opportunity at these levels – trading on around 11.7 times 2015 earnings.