Invest in Recovery for Future Profit

After three years of telling readers how to invest in uncertain times, Rodney Hobson says it is now time to invest for recovery

Rodney Hobson 25 October, 2013 | 10:09AM
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More signs are emerging that the UK economy will continue its improvement and while only an incorrigible optimist would argue that it will be plain sailing from now on, we can at last invest with some degree of confidence.

Thus after three years of telling visitors to the London Investor Show how to invest in uncertain times my message to delegates this week is that we are investing for recovery.

I don’t blame the Bank of England for being cautious in its forecasts but it has now hinted at what everyone else in the country has been saying for several weeks: unemployment is likely to fall faster than it had previously indicated.

The downside is that the bank’s base rate will start to rise in early 2016 rather than later that year. There is scope for the target to move further forward into 2015 although Chancellor George Osborne will be spared the first increase coming before the General Election.

I don’t accept press suggestions that this will be a major embarrassment to new bank governor Mark Carney. It is perfectly reasonable for the bank to revise its timetable for when unemployment will fall to 7%, its self-suggested trigger point for the first base rate rise, in the light of subsequent events.

Forecasting two or three years ahead is a very inexact science. Estimating GDP growth for the rest of this year is hard enough and jobs figures do not necessarily match changes in GDP. The bank cannot be as cavalier with its forecasts as economists can.

In any case, borrowing rates in the real world are already detached from base rate and while banks will attempt to raise them further, the impact of a rise in base rate could be muted. The main effect should be to make savings rates a little less pitiful.

Along with the abandoning of quantitative easing, which has surely run its course in the UK, a modest increase in base rate from the artificially low 0.5% will be another welcome sign that things are getting back to normal, and it’s not often you can call a rise in interest rates welcome.

The one fly in the investment ointment is that share prices have already risen in anticipation. If you are thinking of buying cyclical stocks to cash in on the uptick you are already at least nine months too late. Take a look, for example, at chare charts for housebuilders and recruitment agents.

So it comes back, as I so often argue, to picking stocks with solid dividends and there are still plenty of decent yields above the stockmarket average of 3.4%. With the FTSE 100 index pushing 6,700 points again it’s hard to spot yields of better than 5% among blue chips as we did only a few months ago but you can still do far better than a bank savings account.

Power Plant is Government Wake Up Call

I am no more keen on the deal to build a nuclear power plant than the next man for various reasons, including the fact that nuclear leaves a poisonous legacy for thousands of years and this particular deal is heavily skewed towards the taxpayer bearing most of the financial risk.

What this deal should do, however, is sound a wake-up call for the government, the Labour opposition and the general public that we cannot continue to postpone action on providing energy as we have done for the past 20 years.

Inertia by Coalition and Labour governments has left us over a barrel, almost begging power suppliers to build new plants. It will take 10 years to get Hinckley Point going and inefficient windfarms will not fill the gap.

Likewise gas and electricity suppliers have consumers at their mercy with the current round of price rises. We can all do more to stop wasting expensive energy but the situation will get worse, with corresponding damage to our slowly recovering manufacturing base, without a power plan.

AIM High with Smaller Companies

I shall try from time to time to feature small companies on AIM with the potential to grow,  although I must stress that they will often carry extra risk and do not fit well into my personal portfolio. However, the last such company that caught my eye for this column, Renew Holdings, has seen its share price rise so here goes.

This week I attended a presentation by stockbroker Beaufort of four technology companies and the one that seemed to me to have a niche market that could grow enormously was Starcom, a maker of tracking and monitoring devices using wireless technology.

Growth has been surprisingly slow given the size of the potential market, as chairman Michael Rosenberg admitted. Indeed, the company added a warning that it had scaled back growth projections when it issued interim results at the end of September, not an encouraging start for a company that joined AIM only in February.

On the plus side, there is enormous scope as vehicle and container owners gradually face the reality that they need to keep track of their assets.

Revenue and profits haveimproved over the past three years but there is as yet no dividend, a situation that is unlikely to change soon as cash is, quite rightly, ploughed  into research to keep ahead of the game.

The shares have bounced about quite a bit between 14.25p and 27.25p. Currently they are around the middle of that range. Directors and senior managers own 80% of the shares, which are thinly traded and are likely to have a wide spread between buying and selling prices.

As with Renew Holdings, I shall not be investing because this does not fit my personal criteria. However, if you want to take a risky punt on companies that could be tomorrow’s go-go growth stocks you may want to take a look. If you don’t like the look of it, just walk away.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.