Singer Capital Markets Best Ideas 2019: Highlights from our cross-sector research report, published on 14th January 2019.
This year we present our Best Ideas for 2019 as a two-part selection. Firstly, ten stocks that our analysts believe should be considered strong contenders for any portfolio – good consistent, quality, well managed businesses with good supporting dynamics and financial strength, where there is scope for outperformance. Secondly, six domestically focused stocks expected to perform strongly in the event of a Brexit resolution and the unwinding of uncertainty more generally. Just now, it seems hard to believe that we are not near to, or at, the point of maximum uncertainty. It promises to be a very bumpy ride but these are the companies our analysts believe should be under consideration as we move deeper into 2019. Volatility, by its nature, offers great opportunity and overall we would suggest that the outlook is likely to be rather better than the market and many commentators would have us all believe.
As we leave 2018 behind, there can be no doubt that the global economic outlook is deteriorating and that, at this later stage of the current cycle, we have passed peak growth. Equity markets, ever alert to future earnings performance, went sharply into reverse in the last quarter of 2018 leaving all major markets down on the year. The Dow had its worst December since 1931 but nevertheless finished 2018 at -5.6%, well head of the Nikkei at -12.1%, Cboe UK 100 at -12.7%, DAX at -18.3% and the China’s CSI 300 at -26.3%. The Cboe UK 250 and Cboe UK Small Companies fell 17.1% and 15.0% respectively, reflecting their greater domestic UK exposures and heightening Brexit concerns. Commodities also fell materially in 2018, with Brent crude off 19.2%, copper 21.2% and aluminium 18.5%, which will now reduce global inflationary pressures.
Uncertainties abound of course and, unsurprisingly, markets remain highly volatile, focused on interpreting the nuances of every new data release, in contrast to the far more comfortable days of easy money, global QE and ultra-low interest rates. At its December 2018 meeting, the Fed indicated further reductions in its balance sheet and two further rate increases for 2019 that would have potentially inverted the yield curve – a likely harbinger of recession that the markets took to badly. However, Fed futures quickly turned to suggest a greater probability of a rate cut in 2019 than a rise and they have remained highly volatile since. Today, the market now weights the chance of a rate increase in June 2019 at 20%, followed by a 26% probability of a cut in January 2020. The Fed meanwhile is still talking of being patient and flexible with interest rate rises! The latest US non-farm payroll numbers were stellar, significantly exceeding expectation, and in stark contrast to the messages to be taken from recent PMIs reaffirming a picture of slowing global growth, particularly in China. A mixed message bag for sure. Nearer to home, a number of European economies contracted in Q3 2018, namely Germany, Sweden, Switzerland and Italy, and time will tell whether any have fallen into technical recessions in Q4 2018.
Darkened horizons indeed, but equity markets are prone to periods of excessive optimism and excessive pessimism. Overseas investors, pre-occupied with trade wars, Fed tightening, US Government shutdowns and thoughts of slowing growth and eventual recession, have continued to shun the UK equity market, given the added concern of the perceived Brexit risk. The UK market valuation is now in bargain basement territory, with the Cboe UK 100 trading on a December 2019 PER of just 11.9x and a 5.1% yield. You could be forgiven for thinking that this discounts the worst of potential outcomes, both domestically and globally. We don’t believe that real world conditions look this bad or indeed anywhere near akin to the financial crisis in 2008. If corporate earnings can be maintained and a satisfactory Brexit outcome can be navigated, the UK market ought to regain significant ground, particularly some of the harder hit consumer areas of the market. 2018 was in effect a year of two halves, with the market peaking in May 2018; 2019 might well operate in reverse.
Company reports included within Singer Capital Markets Best Ideas 2019
1. BCA Marketplace: “Uniquely positioned services and growth” (Written by Matthew McEachran, Partner – Senior Research Analyst)
2. Clinigen Group: “Even more scale, balance and growth” (Written by Chris Glasper, Partner – Senior Research Analyst)
3. Curtis Banks Group: “A must own core holding in turbulent markets” (Written by Andrew Watson, Senior Research Analyst)
4. ECO Animal Health: “Forecasting a stronger H2, driven by EU & US” (Written by Dr. Jens Lindqvist, Partner – Senior Research Analyst)
5. Future: “Dynamic online doubler” (Written by Johnathan Barrett, Senior Research Analyst)
6. Gateley: “Overlooked and undervalued – quality and growth” (Written by Trevor Griffiths, Research Analyst)
7. Instem: “Dominating the SEND standard” (Written by Chris Glasper, Partner – Senior Research Analyst)
8. Nichols: “Defensive growth with good momentum” (Written by Sahill Shan, Partner – Senior Research Analyst)
9. SDL: “Conservative forecasts offer upgrade potential” (Written by Adam Lawson, Senior Research Analyst and Oliver Knott, Senior Research Analyst)
10. Trifast: “Track record of delivery not reflected in share price” (Written by Jo Reedman, Partner – Senior Research Analyst)
1. Clipper logistics: “Structural growth drivers in retail sector” (Written by Greg Poulton, Research Analyst)
2. Dunelm Group*: “Visible growth levers and undemanding forecasts” (Written by Matthew McEachran, Partner – Senior Research Analyst)
3. Findel: “Hitting the spot as a digital first value retailer” (Written by Matthew McEachran, Partner – Senior Research Analyst)
4. Fulcrum Utility Services: “Sector leading growth and returns” (Written by Greg Poulton, Research Analyst)
5. MJ Gleeson: “Well on track, S/P weakness presents opportunity” (Written by James Tetley, Deputy Head of Research and Greg Poulton, Research Analyst)
6. Springfield Properties: “Unique positioning and attractive valuation” (Written by James Tetley, Deputy Head of Research and Greg Poulton, Research Analyst)
To receive the full Best Ideas 2019 report, please email Research Entitlement or call +44 (0)20 7496 3000.