If the past 12 months have been a time of uncertainty, investors can be sure of a few things that will definitely take place in the year ahead — probably.
The UK will finally leave the EU by the end of January, barring an unforeseen world-changing event. Equally, in November, the US will stage its presidential elections, in which Mr Trump will be hoping to secure a second term, impeachment proceedings allowing.
Much of the rest remains conjecture: that the economies of the eurozone will further struggle; that interest rates in many developed countries will begin to rise; that Washington and Beijing will sustain a peace that broke out in the final days of December in the tense battle over trade tariffs that dominated geopolitics and caused ructions in world markets for much of the year.
So how do investors position themselves? When the Tempus column considered a similar question this time last year, the qualities it opted for were diversity, global exposure and business activities that as much as possible moved against the traditional cycles.
Those same characteristics would serve an investor well in a year likely to feature plenty of storms. But there are some specific, and differing, themes that might be worth mulling over as well. Here are my five picks for 2020.
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Royal Bank of Scotland
Let’s be optimistic, and embrace the prevailing belief after Boris Johnson’s election victory that a strong Conservative majority will inject confidence into businesses and unlock an investment drive that complements government spending on the UK’s infrastructure.
Royal Bank of Scotland is one of the big five high street lenders whose balance sheet should be busy oiling the wheels of commerce. It should benefit from an uplift in business activity and would also increase its profitability were there an increase in interest rates. this year, which is not inconceivable.
Like its peers, RBS has been unloved by the stock market thanks to its domestic exposure and vulnerability to the perceived threats of Brexit. Yet it increased its profits to more than £1.7 billion in the nine months to the end of September; it is cutting costs, improving return on equity and paying dividends again. Having Alison Rose, 50, as its new chief executive, should instil some additional confidence and momentum.
The bank, still 62 per cent owned by the taxpayer, is very cheap, trading at only 7.1 times Jefferies’ forecast earnings and yielding a highly respectable 6.6 per cent.
Persimmon
A geared bet on the property market, the economy and consumer confidence, the UK’s second-biggest homebuilder is wrestling with rebuilding its reputation after an executive bonus scandal and criticism over the quality of its properties.
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Persimmon’s shares are trading at a bargain-basement price of just under 9.8 times consensus forecast earnings for one of the biggest dividend yields in the FTSE 100, at just over 8.6 per cent.
Some investors and analysts question whether the dividend payout is sustainable, particularly once the Help to Buy scheme comes to an end in 2023.
However, at 31.7 per cent for the first half, Persimmon’s gross margin is among the highest in the sector and its cash reserves of more than £830 million underpin the dividend. That Persimmon’s average selling price, whijuch stands at about £242,912, is lower than its prevailing benchmark should mean it is well positioned in a housing market recovery. It is also desperate to recover its reputation for quality, a characteristic whose power should not be underestimated.
Halma
Quality is something Halma possesses in shovelfuls, and this safety and hazard detection group best known for smoke detectors is chosen for its irrepressible growth, driven by organic expansion and disciplined deal-making.
Halma should bring the attributes of diversity and resilience: its four divisions, which make products ranging from motion sensors to blood pressure monitors, operate in more than 20 countries.
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What is attractive is the relative freedom that it gives the companies it acquires, making it akin to a holding company with a collection of autonomous, and highly entrepreneurial, businesses. This should both limit contagion if a deal goes wrong and ensure that its corporate culture never becomes stodgy.
Halma’s attractions come at a high price: the shares are valued at 35.3 times Stifel’s forecast earnings and yield only 0.9 per cent so investors should, when possible, move in at times of relative price weakness. That is rare at an established company whose price has risen by almost 60 per cent over the past year.
The Renewables Infrastructure Group
This investment trust, known as Trig, has put money into five big windfarms and twice gone to investors seeking funds to cut borrowings and pay for acquisitions, both times having to scale back allocations after strong demand.
With more than 70 solar and wind farm investments in the UK and the Continent, Trig tends to buy operating projects, and will acquire stakes as well as assets, so it receives a slice of the revenues from selling power to the grid, and scale can become rewarding.
Trig is suited to investors seeking exposure to the growing market for sustainable energy, but also has a strong track record in generating income for shareholders and capital growth.
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The shares, which carry a dividend yield of 5 per cent, have risen nearly 38 per cent since they listed in 2013, but a good deal of the growth has taken place over the past nine months.
Jupiter Fund Management
A bet on Jupiter Fund Management is a bet on Andrew Formica, 48, who has been reviving its fortunes since March.
He took charge of a group with assets under management of £45.1 billion as at the end of September, that is too big to be a boutique but too small to carry the clout of a Standard Life Aberdeen.
It had been losing customers, amid underperformance at some of its main funds — the Dynamic Bond Fund, in particular — and has lost out to passive, tracker-like funds.
Mr Formica has helped to reverse the decline and stabilise a share price that had halved in the year before he joined. He has talked of expanding in the US and bolt-on acquisitions, an echo of his deal-making approach in previous jobs.
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The shares, which trade for 14.6 times Investec’s forecast earnings for a yield of 5.8 per cent, are not expensive, and Mr Formica might eventually engineer a sale.
How we did in 2019
Investors who followed Tempus’s tips on the best four shares to buy at the beginning of last year will have been comfortably in profit on their investment. The column picked four shares on January 3, 2018: Prudential, the insurer; 3i, the private equity investor; Diageo, the drinks group; and the Lindsell Train Investment Trust.
An investor who bought all four shares on that date would have recorded a total gain on their holding of 20.1 per cent over the year, against a 12.7 per cent rise in the FTSE 100 over the same period.
There were various reasons for their success. Prudential pressed ahead with plans to hive off and hand out shares in M&G, its fund management business and life assurance operations in the UK and continental Europe. Pru plus the newly issued M & G shares produced a 25.8 per cent return.
Shares in 3i performed strongly, rising by just under 41.8 per cent, boosted by gains in the value of portfolio companies including Action, the company’s highly valued Dutch discount retailer.
Lindsell Train Investment Trust recorded a small fall, of 4 per cent, after the vehicle was hit by investor doubts about the potential value of its holding in Lindsell Train Limited, the private investment group.
Diageo, picked for its global presence, rose 16.8 per cent over the 12-month period.