Investors can shield their portfolio from the volatile market conditions by targeting companies with strong balance sheets.
Royal London Asset Management equities head Jane Coffey believes companies that don’t need to refinance their debt or issue equity will have a huge advantage over their competitors that do.
Even if their earnings were to fall sharply during the downturn, Coffey says they will survive to see in the recovery and shareholders will enjoy the benefits as profit margins rebuild.
Attractive risk reward
“Strong balance sheets will, I believe, continue to be a key differentiator between the winners and losers,” says Coffey.
“Despite relatively strong performance through 2008, I still think many of the mega cap stocks in the UK offer an attractive risk/reward profile given their low debt, strong cash flows and high overseas earnings, supporting their ability to pay good dividend yields.”
“Therefore, my core investments will remain in stocks such as GlaxoSmithKline and AstraZeneca as well as Vodafone.”
In contrast, Coffey believes the banks look likely to need more capital, as do many of the real estate and leisure stocks.
This means that, not only will there be no dividends likely from these companies in the short term but existing shareholders will be diluted out of any recovery.
Sold down sectors to rebound
Coffey is also predicting a recovery in many of the heavily sold down sectors, such as retail, house builders, leisure and resources.
But rather than simply pouring money into the recovery, she suggests a cautious strategy with a strong focus on balance sheets. “History has shown that insolvencies often peak as an economic recovery begins,” says Coffey.
“Just getting by during the bad times is not enough; investors will need to be happy that a company has not run down its productive capacity or retrenched into an intrinsically smaller business.
“Some of the attractive companies in this respect would include Persimmon, Home Retail, and UBM.”
