Investment opportunity still knocks as economy takes beating

Seldom has optimism been such a controversial state of mind. Anyone who dares to voice the hope that recovery may be possible is likely to be called delusional. 

Supersized problems face all economies including the UK, as yesterday’s horrendous GDP figures showed. 

But stock market indices are anticipatory mechanisms. And despite some wobbles this week, they are sending out signals hinting conditions could improve, which may be worth heeding for those happy to be glass-half-full investors. 

Here are some of the best opportunities to build an optimist’s portfolio in the UK, the US and in the energy sector. 

THE UK 

Finding reasons to be cheerful about UK plc does not mean dismissing the scale of the challenges ahead, highlighted by a 20.4 per cent slump in output in April and bleak forecasts from the OECD for the rest of the year. There is a high level of corporate caution. Stockbroker Peel Hunt estimates UK-quoted companies have slashed capital expenditure by £23billion this year, which will impede growth. 

But at the same time, companies will be seeking solutions. Some will be trying, for example, to decrease dependence on China by ‘onshoring’, bringing back manufacturing to Britain. 

Clothing companies could lead this change, good for shares in Coats Group, the thread maker. In the near term, it may be boosted by a nationwide longing for something new to wear, if only because lockdown baking has widened waistlines. 

Despite talk of a paradigm shift in habits, Paul Clifford of wealth manager Sanlam, argues that ‘people will want to go back to living their lives’ – moving house, getting on planes and staying in hotels. 

Taylor Wimpey should benefit from the craving for a house with a garden among those locked down in a flat. The housebuilder’s shares – 101p at their nadir – have risen to 151.5p based on the apparent success of its virtual viewings service. 

Shares in Easyjet, which hit 1508p in February are now 805p, little surprise given the quarantine rules for travellers arriving back in the UK. But Clifford believes the company ‘should be able to see this out’. 

Intercontinental Hotels shares have fallen from 5223p at the start of the year to 3852p, but Clifford contends this company also passes the survivability test. For a bet on smaller and medium-sized companies, James Carthew of Quoted Data, the analysis group, suggests investment trusts such as Schroder UK Mid-Cap. Its holdings include rental homes group Grainger and Dunelm, the homeware retailer. 

Aberforth Split Level Income provides exposure to entrepreneurial businesses, plus the prospect of an income. Both trusts are at discount, that is, their share prices do not reflect the full value of the trust’s holdings.

THE USA 

The damage wrought to the US economy by the pandemic can scarcely be quantified. Yet, as David Coombs, head of multiasset investments at Rathbones the wealth manager, points out, some states have been less blighted and companies are getting back to work. 

Cutting costs will be top priority, however. The technology companies that can deliver such savings include Autodesk which ‘makes software for those who make things’. Shares have risen from $187 to $233, driven by the belief that more businesses will be outsourcing software provision. 

Coombs adds: ‘All governments are also going to want to cut healthcare costs, as the bill for the treatment of unhealthy lifestyles goes up.’ He likes Abbott Laboratories, with its focus on diabetes and Dexcom which specialises in diabetes monitoring devices.

OIL AND MINING 

The oil price has rebounded from its lows, although large job cuts at BP are more evidence of the pandemic’s effect on the oil giants. 

Nevertheless, Clifford considers that Exxon, in particular, may be well positioned to take advantage of more commercial activity and people taking to their cars for staycations. Exxon shares have risen to $53, moving upwards with the oil price which was $21 in March and is now $40. 

Anyone more interested in a thrill ride should consider oil and gas investment trusts trading at deep discounts. Carthew suggests Riverstone Energy which backs US and Mexican exploration and shale businesses. The trust is at a 23 per cent discount. 

He adds: ‘If industries get a kick-start, copper, nickel and other materials will be needed. Blackrock World Mining trust – discount 12 per cent – would benefit from industrial revival.’ 

This could also improve the fortunes of CQS Natural Resources. This trust’s discount is 24 per cent – a reminder that it takes courage just now to be an optimist and that patience and plenty of spare cash are also required.