Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Richard Buxton, manager of Schroder UK Alpha Plus Fund and head of UK Equities.
Equity markets are on a rollercoaster ride, with brief upward climbs interspersed with terrifying plunges. This is largely what we expected for the start of 2009. The poor economic and company news is set against some already fairly dire expectations about the slowdown, and some consequently very low UK share prices. We expect that this sentiment-driven volatility will last for the next few months, but we are confident there is no justification at present for a prolonged drop below current levels. In fact, we believe investors will soon start to come around to the idea that the recession is not going to be any worse than is already factored in.
The stocks to favour as optimism rises are those with more cyclical characteristics; notably stocks that have been beaten down despite good business models and strong mid-to-long-term prospects. These include national carrier British Airways (LSE:BAY). It may seem a strange pick given the global slump and falling airline passenger numbers. But only the fittest players will survive the recession, and solid names such as BA should be among them. The share price looks compelling compared to the value of its assets, and its likely merger with Spanish carrier Iberia should deliver huge strategic benefits.
IT companies Logica (LSE:LOG) and Misys (LSE:MSY) also look like good opportunities, even though investors tend to see these kinds of firms as among the last to be hit in a recession. Fears that the worst has yet to come for these names mean both remain very under-priced. Logica has good order and revenue growth (as shown in the latest results) and the management team’s efforts to pull the disparate company together are starting to pay off. Misys has a strongly performing healthcare unit and almost no value is currently ascribed to its still solid financial services unit.
Merged business information group Thomson Reuters (LSE:TRIL) is similar – a good firm afflicted by investors’ bad memories of the Reuters financial business from the last bear market. This is despite the product offering within the financial division being much improved, not to mention the significant benefits that Thomson’s far more defensive business areas are generating. Along with the cost savings from the merger, these factors are producing some very good results, which are not yet being adequately rewarded by investors.
My final two picks are oil and gas firm BG (LSE:BG) and beleaguered bank Royal Bank of Scotland (LSE:RBS) – two stocks with little in common but, potentially, a lot to gain. The first has been a favoured name for many years and has continued to outperform its peers. With exposure to all the right markets, particularly the fast-growing liquefied natural gas (LNG) one, BG remains one of our top stock picks. Perhaps controversially, so is RBS. Despite its problems, and those of the global banks, we believe there is some significant value in RBS, particularly given government assurances that it has no desire to fully nationalise the sector. With fewer players in the industry and significant government aid, we believe RBS is capable of rebuilding its long-term strength. With the shares currently priced well below the value of RBS’s assets, this leaves plenty of scope for the shares to rise.
The stocks Richard Buxton likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| British Airways | 284.25p | 105.4p | 137.6p |
| Logica | 145.5p | 57.5p | 68.25p |
| Misys | 181.5p | 78p | 116.75p |
| Thomson Reuters | 1,720p | 880p | 1,538p |
| BC Group | 1,415p | 637.5p | 1,012p |
| Royal Bank of Scotland | 333.9p | 10p | 22.4p |