Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Julian Chillingworth, manager of the Rathbone Income and Growth Fund
An interest-rate cut by the US Federal Reserve might have given equity markets some short-term solace, but higher US Treasury yields suggest concerns about the impact on inflation. An economic slowdown in the US is likely to lead to a global slowdown in 2008. There’s now substantial evidence that the UK, having (almost) averted a crisis of confidence in the banking system, is looking at below-trend growth through 2007 and 2008, although not to the same degree as the US. In the long term, new-found respect for risk is a healthy development, but threats to the system remain and we continue to tread carefully. The next few months should see the market bottom out, presenting a better time to re-enter more fully.
Financials have come under severe downward pressure and we believe threats to earnings still linger. Standard Chartered (STAN) offers diversification away from the domestic market, with its strong foothold in emerging economies. These economies have shown remarkable maturity amid the recent turmoil, suggesting that businesses like Standard will not be significantly threatened by bad debts and loan growth. The bank, which is 17% owned by Singaporean sovereign wealth fund Temasek, recently bought the private banking arm of American Express. This is expected to contribute to full-year earnings by 2009, and is funded by existing assets. If the stock price faltered, we would look to buy.
We’ve been adding to defensive growth play Tesco (TSCO). The stock looks cheap relative to growth prospects. The firm is pursuing expansionary initiatives, the most prominent being its roll-out of US stores in November. We believe this launch should allow Tesco to continue to deliver 10%-plus sales growth in the future, offsetting any UK slowdown (although the latter remains supported by strong food-price inflation). Other developments in the pipeline include the opening of its first non-food only store in the UK and a move into garden centres with the purchase of Dobbies. The operational story remains the strongest in its sector.
Halfords (HFD) is a best-of-breed retailer in a sector that is likely to suffer tougher conditions. Sales have benefited from the introduction of new product ranges and trading initiatives – in fact, the company has grown like-for-like sales over the past 18 years. Crucially, it’s the extensive range related to car maintenance and cycling, as well as demand for its core products, that gives Halfords its edge over supermarkets. This year it opened its first central European store in the Czech Republic and dedicated Bikehut stores in the UK. Existing stores re-fits have also enjoyed good returns on investment. A share buyback of £50m has supported the stock. Unsurprisingly, the management has confidence in future growth prospects, and we would buy on weakness.
Finally, Titan Europe (TSW) manufactures wheels and tracks for the agricultural and mining industries. It has a strong balance sheet and cash-generation; it is benefiting from demand from the mining industry and has earnings visibility of more than two years from orders for tracks and wheels. Titan has recently developed and patented a new type of large wheel that is easier and quicker to change, and the company is talking to several suppliers. After a recent meeting with management, we remain confident in Titan’s growth.
The stocks Julian Chillingworth likes
Stock, 12mth high, 12mth low, Now
Standard Chartered, 1,763p, 1,321p, 1,640p
Tesco, 478.75p, 377.25p, 463p
Halfords, 414.75p, 332.75p, 369p
Titan Europe, 257p, 200p, 219p