The uncertainties hovering over the British economy in the wake of political and economic deadlocks finally seems to have come to an end after balloters handed an absolute majority to the Boris Johnson-led Conservative Party. This was a historic victory for the Conservatives in the last 30-years. They won 365 constituencies out of 650. Their victory brought unprecedented spurt in the benchmark indices, especially for the mid-caps which surged the most as they were in deep pain because of Brexit saga.
Also, recently US-China, the world’s two large economies have also negotiated a Phase-1 trade deal which is yet to be signed. This would boost global sentiment in 2020 and help in recovering from the global slowdown, a situation the world is experiencing since last six-months. This move would also bring demand back to market and factories can leverage their resources to satisfy the demand, which will lead to an increase in their earnings.
So it can be said that, in the final month of 2019, the macro challenges hovering over the world economy and Brexit saga which has impacted the British economy the most has partially come to an end, after a Phase-1 trade deal negotiated between the US and China and UK General Election mandate for Tory Party, which reflects that prolonging Brexit drama will come to an end by the end of January 2020.
At the fag end of the year under the changed politico-economic scenario, we are sharing some investment strategy on how investors should approach the UK stocks in 2020:
Play the dividend game: Despite a spurt in the broader indices over the past couple of days, there are many fundamentally strong counters both in large-cap and mid-cap arena offering attractive dividend yield. However, higher dividend-yielding stocks could be good or bad, but quality dividend-paying companies with historically proven strong fundamentals and consistent decent payout ratio over the past 10-years generally experience far less volatility. Therefore, one needs to identify a handful of fundamentally strong companies with proven track records of paying consistent dividends on YoY basis and offering higher dividend yield at the present trading levels. As the dividends have a tendency to increase over time gradually, it becomes one of the basic reasons for investing in dividend-paying stocks. Fundamentally strong businesses that pay consistent dividend generally increase their payout on a YoY basis. Another reason why we are emphasising on dividend-paying stocks is that stock price could go up or down, but dividend-paying stocks offer at least some sort of typically guaranteed return from the investment. It is very uncommon for a dividend-paying business to freeze dividend payment suddenly. In contrast, it has been seen that most of the dividend-paying stocks have increased dividend payments over time.
Chase the leaders within the sectors: Chasing leaders within the sector which are at the threshold of a turnaround has been time and again proven a right strategy to benefit from the trend reversal. Because leaders command the highest market share within an industry and if things are turning favourable for that specific industry, they are the one who gets benefited the most as compared to their peer group companies. That's why they command a premium valuation in the market because the market knows clearly that if things turn positive within the industry they operate, they will be able to penetrate relatively higher to their counterparts, and that's why their stocks surge against the competitors. So, one needs to identify the leaders from a diversified group of industries and build a portfolio of those leaders, which could benefit investments in 2020. Also, leaders create a strong moat against their competition, in terms of aggressive growth, corporate governance, Higher ROCE and ROE, positive Free Cash Flow, Debt-free landscape and attracts the best talent available in the market. It is a mixture of all aforementioned measures that create a leader in any industry and chasing companies which stood at par with these filters have time and again created a fortune for their shareholders. They stand firm when the season is rough and thrive fast when things turn favourable for them.
Identify companies with positive Free Cash Flow (FCF): Free Cash Flow is one of the significant factors of investing by any company. It is defined as surplus or discretionary cash the company is able to generate for its shareholders. If a company is not able to generate positive free cash flow, it reflects that they are spending beyond their affordability. In the wake of negative free cash flow, companies have to generate cash from other sources like debt and equity to meet their obligations and requirements. If they raise funds through debt issue, it will lead to lower profitability on account of higher interest expenses, which would increase balance sheet risks or bankruptcy risk for the company. And in case they raise capital through an equity issue, that would lead to dilution of the stake of the existing shareholders.
Fundraising through the continuous issue of debt or equity to meet their capital requirements becomes less attractive from an investors point of view against those who are funding their requirements through internal free cash flow generation.
Therefore, companies having higher positive free cash flow could sustain relatively better in a rough season than those who are meeting their requirements through continuous debt and equity issues. And, when the season turns sombre, companies with high positive free cash flow could thrive significantly better than those with negative free cash flows.
Identify sectors which were in higher pain due to Brexit saga: Sectors which were relatively in a deeper pain because of Brexit related turbulences primarily because of the earlier heightened prospects of a no-deal kind of exit or a Hung Parliament which could have lingered the problems further and could be the comparatively better-performing sectors in 2020, as stocks pertinent to these sectors are the most beaten-down shares and had been trading at a steeply discounted valuation against the other sectors. But now no-deal Brexit entirely off the table and with a deal already negotiated with the EU bloc for a smoother departure of the UK, reflects that things are turning favourable. Stocks belonging to the sectors which were in a profound pain could lead on the London Stock Exchange in 2020 and likely to hand over a surprisingly good amount of return in a short span of time.
Build a mixed portfolio of large, mid, small and dividend stocks: Securities belonging to various market size in the UK are available at a discounted valuation, however mid-cap and small-cap companies have experienced the higher degree of valuation deterioration in the past three and half years. However, large-cap companies are also available at a relatively lower valuation against their global peer companies. US-China trade war in the recent time has weighed heavily on the UK’s large-cap stocks than domestic stocks, on which Brexit had a higher impact.
The reason we are emphasising to build a portfolio of large, mid, small and dividend stocks is that they will help your portfolio to benefit from the recovery in the global sentiment, fading uncertainties of Brexit saga, and provide decent and regular dividend income from high yielding fundamentally strong stocks.
With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities.
Amidst this, are you getting worried about these falling interest rates and wondering where to put your money?
Well! Team Kalkine has a solution for you. You still can earn a relatively stable income by putting money in the dividend-paying stocks.
We think it is the perfect time when you should start accumulating selective dividend stocks to beat the low-interest rates, while we provide a tailored offering in view of valuable stock opportunities and any dividend cut backs to be considered amid scenarios including a prolonged market meltdown.