Top equity tips for 2009

While stockmarkets have gone from bad to worse in the past 12 months, it’s not all doom and gloom. Savvy investors see good opportunities for making well-placed investments. Moneywise asked some industry experts to reveal the sectors they think will be winners in the economic downturn.

Larger companies have the advantage that they tend to be more stable. They may have more assets to support any borrowing and to fall back on in hard times. They are also likely to have several income streams so, if one dries up as customers cut back, there is still money coming in from other sources. In addition, they are often businesses that have paid strong dividends in the past.

Dividends are a vital source of income for investors in a market where growth is thin on the ground. Darius McDermott, managing director of Chelsea Financial Services, says: “We like more stable stocks paying handsome dividends, such as Vodafone, which is yielding 7%. I would stay away from retail, but M&S is yielding 9%, which has a lot of people interested.”

Top sectors

Aside from the big blue-chip stocks, certain sectors are favoured by the experts. These tend to be the traditionally defensive sectors. Nick Raynor, an investment adviser at The Share Centre, says these include utilities such as Northumbrian Water and National Grid. He points out that the need for heat and power will never disappear just because people are tightening their belts.

Independent analyst Peter Temple and former investment banker John Mulligan chose United Utilities for their Interactive Investor model retirement portfolios, and it is the only selected stock showing growth since they began following it.

There are other consumables that are always in demand and, for the nicotine-addicted, this means cigarettes. It may not be the most politically correct stock, but British American Tobacco (BAT) is a popular pick. Raynor highlights its defensive characteristics, and Temple and Mulligan selected it for their model income portfolio – again it is the only stock showing a gain since it joined that portfolio.

Mike Jennings, senior investment manager of Global Equities at Premier Asset Managers, has invested in a US alternative: “Altria – better known as Philip Morris USA – dominates its market. Altria management has a strong focus on shareholder returns and pays away 75% of the company’s net income.”

Household staples are also likely to remain in demand. Raynor says: “You don’t stop buying dishwasher powder because the economy is in difficult shape.” For this reason, he recommends Reckitt Benckiser, the British cleaning products group.

Another traditionally defensive sector is pharmaceuticals on the grounds that people still get ill and need medicines, even when their finances are in bad shape. However, the experts are cooler on pharmaceuticals, because of structural difficulties with the sector. Henk Potts, an equity strategist at Barclays Wealth, says:

“Pharmaceuticals are benefiting from their defensive characteristics, but there is the threat from generic competition. Plus it’s getting harder to get drugs through the approval system . . . and there’s a weak pipeline of new drugs coming through, which is the lifeblood of the industry. In this sector, our favoured stock is AstraZeneca, which is most able to face up to these problems.”

Medical companies also hold potential. Jennings says: “One such example is German-listed Fresenius Medical Care. It is the world’s leading provider of equipment and services for kidney dialysis – clearly a market unaffected by economic cycles. Together with leading competitor, Davita, Fresenius Medical Care controls two thirds of the US dialysis market.”

On the defense

Outside the defensive sectors the experts urge real caution. However, they say there are still opportunities for the canny stock-picker. These include companies that stand to gain from economic uncertainty and buck the broader trends in their sectors.

McDermott says, for example: “There are some retail winners from people trading down, such as Aldi and Lidl. People have less to spend on food so, rather than changing what they buy from retailers such as Waitrose or Sainsbury’s, they are changing where they buy it.”

Others are looking ahead to recovery, for companies that will benefit from international growth. Potts says: “We are currently facing an almost perfect storm of uncertainty. But history tells us that the storm will pass and we have to look through to that. Strong companies will make money out of the current misery if you have a decent time-horizon.

One approach is to focus on companies that stand to gain from renewed economic strength at the end of the global downturn. Justin Urquhart Stewart, co-founder of Severn Investment Management, says: “If you are looking at a global recovery in 18 months, some of the companies to benefit will be the mining stocks which have suffered recently. When there is a pick-up in demand, you will see the miners come up again.” McDermott adds: “People like oil stocks such as Shell and BP.”

However, these remain risky investments. Raynor says: “Mining is a good longer term recovery play, but it is currently incredibly volatile. It’s not unusual for a stock like Rio Tinto to be up 4.5% and down 2.5% in a day. We tell clients to tread carefully.”

Potts also favours mining, and his favoured stock in the sector is BHP Billiton.

Stretched budgets

However, whether investors are playing a defensive game or looking for recovery plays, it pays to be aware of special risks in this market. McDermott points out: “One of the biggest additional risks in the market at the moment is of companies going into administration, such as Woolworths in November. Just because it is a company with a 100-year history and a stalwart of the high street, it doesn’t mean it’s safe in this market. I would avoid anything that relies on public discretionary spend.”

Jennings adds: “The most dangerous companies to buy at present are those with a weak competitive position, low margins and a reliance upon banks to provide financing. Retailers, car manufacturers, airlines and heavy industrials often fall into this category. High fixed costs, high volumes of sales and low margins are typical. With these companies, sharply falling sales and rising costs of servicing their bank debt can easily become crippling. Recent UK examples of MFI and Woolworths are typical.”

For many investors, these risks may lead them towards collective investments. Exposure to defensive can be gained in the equity income sector. Gavin Haynes, managing director of Whitechurch Securities, says: “We like equity income. Historically income has been a huge contributor to total return. We like Artemis Income and Invesco Perpetual Income; they’re good solid investments.”

McPhail agrees, adding: “I’d be sanguine about dividends over the next year, but I’m comfortable that, over the long term, equity income will outperform because of the yields. I would be happy with any of the usual suspects – Jupiter, Artemis, Schroder or Invesco Perpetual.”

Urquhart Stewart says investors may want to buy into an index: “Overall, the market is still looking poor. It’s one of those markets where the index may be better than individual companies, so exchange traded funds can be very helpful. Personally, that’s what I will be buying.”

There are opportunities in the market. And while the market can go up as well as down it pays to have at least some of your portfolio positioned to take advantage of this recovery.


Darius McDermott of Chelsea Financial Services, is cautious about the outlook for the equity markets for 2009, but picks out:

1. Artemis Income

The manager, Adrian Frost, has a great track record and the fund has held up well over the past 12 months, falling by 18% compared to the equity income average of -26%.

2. BlackRock UK Absolute Alpha

This fund aims to beat cash over a three-year cycle by using long and short equity positions. Mark Lyttleton has posted a 27% return over that time compared with the 11% performance of cash.

3. Casenove UK Absolute Target

Although this fund was launched in August last year, it has returned 4.8% since then. Tim Russell focuses on defensives such as BAT, Vodafone and pharmaceuticals, rather than cyclical stocks such as retailers.