Brewin Dolphin's top 10 Investment thoughts for 2014 and other tips
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Brewin Dolphin’s top 10 Investment thoughts for 2014 and other tips
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
For photos and direct contact details of all those quoted below please visit
http://www.brewindolphinmedia.co.uk/media.aspx (For disclaimers see page 7)
“……..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!
14. 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-and-
comment/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-and-
comment/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.”
2Finally, 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
3potential 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
4cheap, 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
5Though 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.
-ENDS –
HAPPY NEW YEAR!
6Disclaimers
The value of investments can fall and you may get back less than you invested.
No investment is suitable in all cases and if you have any doubts as to an investment's
suitability then you should contact us.
Past performance is not a guide to future performance.
Any tax allowances or thresholds mentioned are based on personal circumstances and
current legislation which is subject to change.
If you invest in currencies other than your own, fluctuations in currency value will mean
that the value of your investment will move independently of the underlying asset.
The opinions expressed in this article are not necessarily the views held throughout
Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd
accepts liability for any direct or consequential loss arising from the use of this document
or its contents.
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