Brewin Dolphin is one
of the leading wealth managers in the UK with over £28 billion of funds under
management for more than 100,000 clients
“……..our
greatest fear for 2014 is the absence of fear itself!”
1. David Nicol - Chief Executive foresees
a tight race over Scottish Independence and warns about complacency. There are
a number of critical issues including the currency to be debated and many
questions to be answered. We will be
formally asking the Scottish Government about the reach of their proposed
regulatory institutions for financial services in Scotland and their
implications for clients.
2. Stephen Ford – Group Head of Investment
Management said: Gold is likely
to drift lower and I expect it to trade through $1000 per oz over the next
12-18 months. A reduced level of QE from the US central bank should see longer
dated interest rates rise and raise the opportunity cost associated with
holding the yellow metal. What is more, as the global economy continues to
improve, so the investment community will be less compelled to own safe haven
assets.
Europe remains cheap, unloved and
under owned, and for those with ambition and a huge appetite for risk, you may
want to look at Greek equities in 2014 (Alpha ETF FTSE Athex Large Cap). For a
more measured approach, the enforced consolidation within the banking industry
makes Europe generally look particularly interesting and I am pleased this
opportunity has been recognised by both Neptune European Opportunities and
River & Mercantile World Recovery – two funds our Head of Fund Research is
recommending for next year.
3. Rob Burgeman, Director Investment
Management
“If 2008 was the perfect storm
for investors, with just about every asset class falling, 2014 is shaping up to
be its antithesis – the perfect calm.”
The economic environment looks
stable and improving, central banks seem reluctant to choke off any nascent
recovery, leading to a continuation of the ultra-low interest rate world and
the fifth anniversary of base rates below 0.5%.
With a general election in the UK looming it makes any major negative
fiscal changes unlikely in the short term and providing – at long last – some
welcome stability for longer term investors.
The burgeoning recovery in the US
should continue and the early glow on the European economic horizon might just
be signs of a dawning recovery rather than rioting Athenians. Even the Middle East seems to be slowly defrosting
with the Iranians finally negotiating on the nuclear issue.
The background, then, is
conducive for investors and is reflected in our expectations of decent returns
for equity markets – particularly developed ones – over the year ahead. Perhaps, our greatest fear for 2014 is the absence
of fear itself!
4.
Guy Foster, Head
of Portfolio Strategy – forecasts the FTSE total return could deliver
17%........
FTSE 100 to reach 7,400 which with an average yield of 3.2%
is over 17% from here…. the S&P could make 1,900 and the Nikkei should
breach to 18,000. More - http://www.brewindolphinmedia.co.uk/media/press-releases-andcomment/2013/december/2013-12-13.aspx
5.
Nick Oliver,
Director of Financial Planning – make your grand-children millionaires
“Putting £300 a month into a
(grand) child pension could not only turn them into pension millionaires when
they retire, but during their working careers, they can use their fund for
commercial property, even if it is linked to their business. This will be good
for future entrepreneurs, lawyers, vets, plumbers and farmers – a fantastic
legacy for a potentially debt-laden generation,”
More
- http://www.brewindolphinmedia.co.uk/media/press-releases-andcomment/2013/december/2013-12-12.aspx
6.
Guy Foster -
Emerging markets will have their time - but it is not now. “Rising
transportation costs, deteriorating energy competitiveness and general
institutional malaise, makes the recent events in Thailand and the Ukraine be
likely themes for insecure countries in the new year. The World Cup in Brazil seems sure to be a
national embarrassment, making October’s elections there hugely uncertain – so
steer clear. Investors should focus on
more developed emerging markets where intellectual property rights are
entrenched: markets like Korea should
rebound well following their recent slowdown.
7.
Nick Oliver -
“April 2014 brings another fall in the Life Time Allowance for pensions, from
£1.5 million to £1.25 million,”
It is possible to keep a pension
pot limit at £1.5 million - but careful analysis is necessary to evaluate the
pros and cons of electing for this protection.
8.
Elaine Coverley
- “Capital appreciation – the watch words for
2014” “During times of austerity investors hunker down and focus on income,
but given the more benign global backdrop expected in 2014, investors should
shift their attention to capital appreciation over yield.”
9.
Guy Foster -
Investors should capitalise on Japan’s extraordinary inflationary policies
“The yen is falling to 120 to the
dollar; whether it gets there in 2014 remains to be seen, but we expect these
extraordinary policies pursuing inflation to remain potent forces of value
creation for investors.”
10.
Iain Armstrong -
Oil and Gas Analyst - Time to end four years of hurt “Fuelled by a new
sense of prudence in capital spending plans and supported by relatively strong
oil and gas demand, we think that investor confidence in the sector will return
in 2014.”
Finally, a possible Christmas
present for banking enthusiasts and which may just come true is The Bankers’ New Clothes’
according to Ed Salvesen, Brewin Dolphin
Banking Analyst– a superb read regarding the impact of increased capital on
economic growth and a true proponent of the higher equity story.
For our Top 12 Stocks and Top 6 Funds – see
below
Brewin
Dolphin’s favourite stocks for 2014
1.
DIRECT LINE –
rescue your income shortfall with Direct Line’s potential 40% dividend growth -
Direct Line could yield 8.9% in 2015 as it cuts costs and can afford to pay out
more of its earnings due to its strong and improving capital position.
Management incentives are aligned with large share options vesting if it hits
its targets. Direct Line IPOed successfully in 2012 and is the largest provider
of motor and home insurance in the UK. (Nik
Stanojevic, equity analyst)
2.
CAIRN –
significant upside potential to net asset value from major exploration
programme in the next year, starting with offshore Morocco. (Iain Armstrong, equity analyst)
3.
NESTLÉ -
After a difficult 2013, we believe things are looking up for Nestlé. Firstly,
the loosening of the Chinese one-child policy is good news for its Infant
Nutrition business. Furthermore, it is undertaking a portfolio restructuring
exercise; it recently sold its 10% stake in Givaudan and in April 2014 it might
decide to sell its 29% stake in L’Oreal back to the company. What will it do
with the money? Further acquisitions in the Nutrition space are likely, but
shareholders could welcome a return of cash. (Nicla Di Palma, equity analyst)
4.
BG GROUP -
Return to positive free cash flow in 2015 due to a more than tripling in
production from Brazil and the completion of the Queensland coal to LNG
project. (Iain Armstrong, equity analyst)
5.
DRAX - As
Drax shifts from coal to biomass it will benefit from rising power prices and
the Government’s renewable subsidies; we expect double digit earnings and
dividend growth in 2014. Ironically Drax was one the UK’s largest carbon
emitters but after refitting its generators will become one of the UK’s largest
renewable generators. (Elaine Coverley,
head of equity research)
6.
PRUDENTIAL -
Life insurance can be a dull sector but we believe that Prudential’s
significant exposure to a rapidly growing middle class in Asia makes it one of
the best placed insurers globally. (Ruairidh
Finlayson, assistant director-equity analyst)
7.
INDITEX - With
tentative signs of recovery among European consumers, a strongly fashionable
offering with good cost control and low markdowns, Inditex is likely to do well
in 2014. The increasingly attractive homeware offering and the incredible
potential coming from the
underpenetrated US market, should drive its revenue and margin growth. (Nicla
Di Palma, equity analyst)
8.
NEXT - 2014
should be another good year for Next. Growth in retail stores remains subdued,
but Directory sales continue to boom.
Homeware should drive sales growth in the year to come and the strong
free cash flow generation is likely to mean further buybacks in 2014. (Nicla Di Palma, equity analyst)
9.
TELECITY - is Europe’s leading provider of premium
carrier-neutral data centres, has underperformed of late due to UK growth
worries and botched interim results but we believe it can turn this around with
the hiring of a “FTSE 100 quality” Finance Director and an improvement in its
markets, driven by the ever increasing need for connectivity in key internet
airports. (Ruairidh Finlayson, assistant
director, equity analyst)
10. G4S - New management and a new
approach, led by a forensic examination of all contract performance, an
increased focus on organic revenue growth and sustainable free cash flow. (Iain Armstrong, equity analyst)
11. INTER CONTINENTAL HOTELS GROUP –we
believe the long term growth story remains very much intact. There have been a
few disappointments in recent results but we would argue that this is a long
term positive as it shows that management has been willing to forgo growth to
protect the brands, which are the most important element of the investment
case. IHG has a 6% market share and a 15% share of the global pipeline of rooms
so we believe that it is reasonable to believe that it can continue to gain
market share. It is already the largest hotel chain in China and has an
impressive pipeline of hotels in Tier 1, 2 and 3 cities. We continue to like
its long term fundamentals with an impressive exposure to both the US and China.
(Ed Salvesen, equity analyst)
12. HAMMERSON shares can be bought on a 12%
discount to forecast net asset value and offer a dividend yield of 3.8%. This
looks a bargain in a January sale! Shopping is moving forward as the malls aim
to become venues for a whole family day out, with eating, entertainment and
free parking some of the additional attractions now being offered. Thus, we
believe that retail is not dead. After all, retail rental values are now
beginning to increase after 25 months of falling values. Hammerson has some
significant developments in hand at Croydon, Leeds and Brent Cross, all of
which are due to start in 2014. Add in its interest in the hugely successful
European Retail Villages (which includes the Bicester designer outlet) and new
large shopping malls in Paris and Marseilles in France and the story gets
rather interesting. (Stephen Williams –
equity analyst)
Brewin Dolphin’s top 5 funds by Ben Gutteridge, Head of Funds Research
Despite an improving growth
outlook, a benign inflationary environment should afford the developed world’s
major central banks the flexibility to maintain accommodative monetary policies
throughout 2014. Though valuations are no longer outstandingly cheap, this is a
very powerful tailwind for higher risk assets such as stocks and lower quality
bonds.
For that reason we are
recommending an equity fund in the UK, US, Europe, and Japan. We are also
recommending a sector specific bond fund that should be able to enjoy absolute
returns, despite the headwinds of rising bond yields.
We are not making a
recommendation in Emerging Markets. Though this asset class may well be pulled
along by the better performance from developed markets, the region still faces
many challenges. Issues the asset class must contend with include the
adjustment to a less commodity intensive growth path for China, as well as the
initiation of US monetary policy normalisation; the former impacting national
revenues, and the latter increasing the cost of funding.
|
6M
|
1 Year
|
3 Years
|
River and Mercantile UK Equity Smaller
Companies
|
28.19%
|
59.23%
|
114.25%
|
FTSE Small Cap TR
|
10.85%
|
35.55%
|
56.58%
|
Neptune European Opportunities
|
8.19%
|
24.44%
|
29.22%
|
FTSE World Europe ex UK TR
|
6.83%
|
26.87%
|
35.83%
|
Old Mutual US Dividend*
|
0.55%
|
N/A
|
N/A
|
S&P 500 TR
|
3.58%
|
27.48%
|
55.13%
|
Schroder Tokyo Hedged**
|
N/A
|
N/A
|
N/A
|
Topix TR
|
11.78%
|
64.16%
|
56.24%
|
Invesco Perpetual Global Financial
Capital***
|
5.61%
|
19.83%
|
N/A
|
Markit iBoxx Sterling Corporates TR
|
‐0.51%
|
3.07%
|
25.47%
|
River and Mercantile World Recovery****
|
20.62%
|
N/A
|
N/A
|
MSCI World TR
|
2.87%
|
22.52%
|
37.03%
|
*New management began in April 2013
**GBP Hedged share class launched in July 2013.
Original fund launched in 1981
*** Fund launched in November 2012
**** New management began in April 2013
1. UK – River & Mercantile UK Smaller
Companies
This fund is managed by Daniel
Hanbury who uses the firm’s PVT (Potential, Valuation and Timing) philosophy to
manage assets. We are quite surprised that this fund, at around £50 million (at
September 2013), has not attracted more assets. This is all the more so as its
impressive performance has been underpinned by strong stock selection and
sector allocation, which stands testament to River & Mercantile’s robust
investment process.
2. US – Old Mutual US Dividend
This fund is managed with a value
bias and, therefore, invests more heavily in areas such as industrials and
financials. These sectors trade more cheaply due to their volatile earnings
stream, however, as confidence in the recovery becomes more entrenched, we
expect them to outperform.
3. Europe – Neptune European Opportunities
Though we do not expect much in
the way of GDP expansion next year from Europe, even a modest improvement in
revenues would translate into meaningful earnings growth. This is a result of
lean workforces significantly dampening operating costs. The Neptune fund,
managed by Rob Burnett, has had a challenging couple of years as European
economic performance disappointed, however, given our marginally more positive
outlook, is well placed to benefit in 2014.
4. Japan – Schroder Tokyo GBP Hedged
As Japan continues to make modest
strides towards meeting its inflation target, we believe the Japanese
authorities will continue, unrelenting, with their current course. This means
further reform efforts from Prime Minister Shinzo Abe, but also more
(offsetting) accommodation from the central bank. This combination should prove
supportive for Japanese risk assets, however, it is not likely to be a
favourable one for the yen. As a result we would recommend Schroder Tokyo GBP Hedged.
Managed by the vastly experienced Andrew Rose, this fund is currency hedged and
exhibits a marginal value bias, investing in the parts of the market most
sensitive to broad economic recovery.
5. Bonds – Invesco Perpetual Global Financial
Capital
We suspect next year will be a
challenging one for generic bond funds as longer dated interest rates continue
to creep upwards. As a result, our top pick within the bond fund universe is
structurally positioned to cope in this environment. The Invesco Perpetual
Global Financial Capital fund invests across the capital structure within the
Financial sector, including senior bonds, subordinated debt, and even
equity.
There are a number of variables
that should allow this fund to deliver next year. If, as we believe, longer
dated interest rates are rising due to better economic growth, the asset
quality of Financials’ balance sheets should also improve. Furthermore, the
improved margin from making additional loans, whilst deposit rates remain
firmly anchored, will be earnings enhancing.
We must point out, however, that this bond fund will perform poorly if
economies experience a negative, or deflationary, shock. All five of these
funds, therefore, are firmly risk on and do not constitute the makeup of a
‘balanced portfolio’.
6. Spicing up 2014 Portfolios
For those seeking to add even
more risk into portfolios, we would suggest investors consider the River &
Mercantile World Recovery fund. This fund is as purer play on global recovery
as one is likely to find, with Europe and Japan dominating the exposure. More
broadly this strategy invests in out of favour areas within the market, and
that stand to benefit the most from an improved global environment. Companies
are not selected on valuation grounds alone, however. A catalyst for a rerating
must also exist, such as management change or industry consolidation.
