Pardon My Optimism
The 0.2% contraction in the U.K. economy is extremely disappointing. The mild reaction of the stock market is perplexing. We are less than a month into the New Year and it is already clear that optimism will be tried to the limited before 2012 is out.
First, the GDP figures for the fourth quarter of 2011. Given the mild weather, in sharp contrast to the stay-at-home snow of December 2010, I had hoped for a tiny improvement, at worst no growth and at best 0.2% expansion. That was always on the optimistic side but a drop of 0.2% is a pretty poor outcome and was worse than even the more pessimistic forecasts of minus 0.1%.
Perhaps investors remembered the 0.5% fall in the previous fourth quarter and decided that this was not too bad after all, for the FTSE 100 index fell only 29 points on the news and recovered strongly the following day, topping 5,800 points at one stage. Now that really is optimism.
Consider the negatives: the U.K. economy is shrinking again; much of Europe ditto; no end in sight for the eurozone crisis; Greece is negotiating the terms of a default on its sovereign debt with Portugal poised to follow; and for good measure we could see a disruption of oil supplies from Iran that would drive the already high oil price through the roof. Happy New Year.
Do not look to the World Economic Forum at Davos for solutions. Davos doesn’t do solutions, however valuable it may be in bringing political and business leaders together at considerable expense.
So are we downhearted? Not a bit of it. Once again we come back to the point that shares represent the best and safest investment. It’s just a case of deciding how far you want to chase after them. In my view, anything above 5,700 on the FTSE looks like overvaluation at this stage.
That overvaluation, though, applies only to the market as a whole. What it means is that you have to look more carefully to spot the shares that represent good value. Among stocks that I already hold and think are worth topping up are National Grid (NG.), Balfour Beatty (BBY), Royal Dutch Shell (RDSB), GlaxoSmithKline (GSK), Sainsbury (SBRY), United Utilities (UU.), Vodafone (VOD) and WS Atkins (ATK). That’s quite a list.
There are not many other retailers that I fancy, but Marks & Spencer (MKS) (which I don’t hold) has excellent fundamentals. Elsewhere it is worth looking at the likes of Go-Ahead (GOG) and FirstGroup (FGP) in transport and leisure, though I would stay well clear of the leisure side of this sector given the problems in package holiday companies and the effect that the sinking of a cruise liner will have.
Utilities offer some attractive yields on reasonable price/earnings ratios and have solid defensive prospects. There are some very attractive yields in insurance but I regard this as a risky sector because you never know what is round the corner.
I have turned much more cautious about construction, especially housebuilders, because I think a fair amount of recovery is priced into the shares already. Given the failure of the economy to recover at even a snail’s pace, and allowing for the fact that most of the boost from the Olympic Games has fed through by now, this is a sector where you really do need to do your homework.
I don’t like media, especially newspapers and magazines which are under enormous pressure to maintain sales and advertising while reducing staffing costs. It looks like a vicious spiral and the press still hasn’t come to terms with the electronic age. Food producers look equally distressed with the supermarkets forever tightening their grip.
Information technology shares look fully or overvalued. It’s not that there is anything wrong with the companies as such, just that there is so much better value elsewhere.
The two sectors that are bouncing the FTSE 100 index up and down most are banks and mining. I can’t feel much enthusiasm for either sector given the volatility, though that can present opportunities to buy on the bad days.
There is some merit in having one bank in your portfolio, in which case it has to be HSBC (HSBA) or Barclays (BARC). The former looks the better shot, given its greater exposure to the growth areas of Asia.
In mining, most companies are offering pretty poor yields. I really can’t see the attraction and this sector will be worst affected by sluggish economic performances in Europe and the U.S.
One final point on this theme. If you have not used up your ISA entitlement for the current financial year, think about doing it soon. There is little more than two months to go and, given the volatility of the stock market, you want to pick your moment to pounce rather than scramble at the last minute.
Laugh All the Way To the Bank
The gap between the haves and the have nots widened last year – and we are not talking about rich and poor people, we are talking about companies on the London Stock Exchange. The choices are as clear cut as they can be for private investors.
Capita Registrars, which the Morningstar Professional Services Rankings Guide shows as handling the registers of more than 1,000 LSE-quoted companies, has come up with its final total of dividends paid in 2011 and the figure is even better than the initial estimate.
Dividends paid last year totalled a record £67.8 billion, an increase of 19.4% over 2010 when payout were depressed because BP (BP.), hitherto the biggest payer, suspended its dividend in the wake of the Gulf of Mexico disaster.
Special, one-off dividends increased and while, by their very nature, these cannot be replied on every year, we should see another bumper year because Vodafone is due to pay out £2 billion next month from income received from its investment in Verizon Wireless in the U.S.
Rodney Hobson is a Morningstar columnist and author of four books, including How to Build a Share Portfolio. Each week Rodney provides his views on the latest market developments; the views contained herein are not necessarily those of Morningstar and should not be construed as financial advice.
