Investments for the recovery

With plans being drawn up as to how the UK exits the lockdown and markets showing signs of starting the long road to recovery, we provide our recommendations on investment opportunities investors could consider.

Equities

The retail and consumer sector has been hit hard with lockdown measures and social distancing proving to be a challenge. However it has the potential to recover quickly as pent-up demand is allowed to release if lockdown measures cease in the coming weeks.

It’s important for investors to understand there’s a lot more risk involved with this sector. It should be considered lockdown and social distancing may continue to affect the retail sector for the foreseeable future and needs to be taken into account before making any decisions.

The mining sector is usually highly geared to global economic growth but at times of crisis it’s not an area most investors would flock towards. However, there are a number of factors currently making it an interesting and attractive proposition. Firstly it went through its own mini crisis several years ago and as a result many have been forced to cut back on costs and fix their balance sheets. Commodity prices have fallen back but industrial metals have done far better than most others especially when compared to oil – for example iron ore prices still average higher than in 2018.

So, for investors looking for opportunities in these sectors, here are some stocks across that may see a recovery:

Boohoo continued to display strong momentum heading into 2020 with full-year results showcasing top line revenue growth of 44% and profit margins on the up. Compared to its rival ASOS, Boohoo has better margins and more consistency with earnings growth albeit at a higher valuation. With a strong marketing strategy reaching the correct target audience, strong associated brands in PrettyLittleThing and NastyGal and continued innovations on its manufacturing automation, it is poised to support the next growth run as sales continue to grow overseas. Boohoo has held up well this year with shares positive but we still think there is more room to grow.

Diageo has been heavily impacted with trade from bars and restaurants effectively being non-existent almost overnight. The company has suspended its £4.5bn capital return programme as a result of the crisis but looking past this, emerging markets show promise and there are already signs of a pick-up in China to normal levels. It’s clear this is more of a short term issue and when trade returns, so will demand. Shares are trading at more attractive levels than they were towards the end of 2019 so there is an opportunity here.

Gym Group (high risk) is another company which has been directly affected by the lockdown in respect to social distancing measures. Full-year results in March showcased a 24% increase in revenue growth alongside a 36% rise in adjusted pre-tax profit, however it’s worth noting it did cancel its dividend as a result of coronavirus’ impact. Should the lockdown be lifted it’s likely to return to winning ways, however if prolonged there could be some trouble ahead with high leverage levels. Nevertheless, this is a pick for future potential but investors must be aware of the higher risk and we would recommend drip feeding into the stock.

The shares of BHP and Rio Tinto have performed reasonably well in this crisis given their cyclical nature. Both should offer good growth exposure to any recovery in the global economy while also paying a good dividend even though there will be the pressure to cut these according to the hit on earnings this year. BHP offers a slightly more diversified exposure across key commodities and investors will be relieved they sold their US shale oil business last year at a good price, while Rio Tinto provides investors a narrower focus on iron ore and copper.

BHP and Rio Tinto are our preferred options in the mining sector, both offering capital growth with good dividend income and for investors willing to accept medium to higher levels of risk.

Funds

Covid-19 has thrown the healthcare sector to the front line of this crisis. The pandemic has offered segments of the sector an unprecedented opportunity to innovate and to fast track product and service development, highlighting a tech-rich growth dimension on top of its traditional defensive characteristics.

The urgency of finding a cure has pushed companies, namely those that use innovation and technologies to aggressively develop vaccines or treatments, into the spotlight. So far numerous companies, scientific groups and institutions in the US, Europe, China and Japan have shown their commitment to combat the outbreak, equipped with support from policy makers to fast track the approval process. At the same time, the companies that provide platforms and telemedicine services for online medical diagnosis and remote medical care are also owed their recognition and status.

The following vehicles provide investors the platforms to be involved in the opportunities in the sector:

Polar Capital Healthcare Opportunities Fund is actively managed by Daniel Mahony and Gareth Powell, both of whom have extensive knowledge of healthcare from industry and stock selection/portfolio management levels. By investing in a globally-diversified portfolio of companies within the healthcare industry, the managers aim to preserve capital and achieve long-term capital growth.

Worldwide Healthcare Investment Trust actively invests in the global healthcare sector with the objective of achieving a high level of capital growth. The portfolio consists of diversified holdings in pharmaceutical, biotechnology, healthcare equipment, services and technology companies. Owned by US group OrbiMed Capital, the trust is actively managed by Trevor Polischuk and Sven Borho, who have many years' experience of investing in the healthcare sector.

Taking a wider view of the market, the following three funds have proven their ability to generate returns in excess of their respective benchmarks when markets have been rising. Two focus on increasingly prominent trends while the other seeks companies in the ‘sweet spot’ mid-cap area of the UK market, who are able to increase their earnings faster than the market average.

Smith & Williamson Artificial Intelligence - the fund’s high sensitivity to market movements and differentiated approach has produced some strong results in its relatively short time in the market. Innovation is at the heart of the strategy, with artificial intelligence (AI) being not only something the team look to invest in, but also something incorporated into the investment process. AI will be a persistent and growing theme in the global economy, and this fund allows the chance to capitalise on it.

Merian UK Mid Cap - offers concentrated exposure to some of the best FTSE 250 ideas and is delivered by a very reputable manager. It’s certainly one of the more risky funds within the space, falling hard as the crisis took over but delivering returns in excess of 35% since the market lows. When held over the long term, the growth-orientated strategy undeniably has the potential to outperform many of its peers as well as the benchmark.

VT Gravis Clean Energy Income - recent market movements have highlighted the frailties within the oil sector, particularly with some companies cutting dividends for the first time in decades. This, along with the increasing awareness for climate change, should increase investor interest in clean energy as well as dependable sources of income. Since inception in 2017 it has come true on its promise, but has also delivered very strong returns - outperforming the sector by a comfortable margin.

Murray International Investment Trust - Investors are increasingly turning to investing a proportion of their capital across the world and seek companies with either attractive dividend policies to provide alternative sources of income or display quality growth characteristics, as Brexit and Coronavirus raise question marks over the UK's growth outlook. Global companies may be less exposed to dividend cuts. There are though good revenue reserves which could be called upon to help protect the yield.

Murray International can give investors global exposure, with holdings across regions such as Asia Pacific (29%), North America (23.2%), Latin America & Emerging Markets (12.5%) and Europe (13.2%).

There have been 14 years of consecutive dividend increases, making this suitable for an investor who wishes to invest across the globe and requires a fund geared to Asia and Emerging Markets and income. Despite a comparatively high weighting to Asia and Emerging Markets, which leads to the fund often performing very differently from its peers, there is a defensive emphasis within the portfolio. In response to the current crisis the manager highlights the portfolio diversity of equities and bonds, with an emphasis on companies with strong balance sheets.


All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

 
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