It has been a turbulent six months for global markets. After a post-pandemic bounce, performance has been lacklustre against a backdrop of rising inflation and the Ukraine invasion.
While the FTSE may have outperformed US indices – it is down 3 per cent compared with the S&P’s 20 per cent – it has still had a bout of underperformance.
Inflation fears have rocked some sectors more than others meaning there is a divergence in the UK’s top stocks.
Our experts have handpicked the UK stocks they expect might stage a comeback by the end of the year
While bank stocks have performed well off the back of rising interest rates and oil majors have seen their share prices soar, other sectors like consumer and discretionary goods have faltered.
We asked five experts for their top picks for the UK shares they expect to rebound.
Price rises have trickled through to most of the economy, but Unilever, who warned of ‘unprecedented cost inflation’ back in April, is facing broader issues.
Star fund managers Terry Smith and Nick Train hold large positions in Unilever but both have expressed their disapproval of its management.
Train described Unilever’s most recent financial performance as ‘pedestrian’ and Smith has criticised management for focusing on ‘woke’ issues.
Unilever has said it expects its costs to rise by £2.3billion in the second half of 2022 as the price of palm oil, aluminum and other commodities have doubled or tripled compared with 2020.
Shares in the consumer goods giant plummeted on news of the Ukraine invasion. It was forced to stop all operations in Ukraine and suspended all imports and exports of products in and out of Russia.
Its woes have attracted the attention of activist investor Nelson Peltz, who has built up a 1.5 per cent stake via Trian Fund Management. The appointment is likely to pile the pressure on Unilever for a bigger revamp of its strategy, following its unsuccessful £50billion bid to buy GSK’s consumer healthcare arm earlier this year.
Where Unilever has an advantage is that it has relatively strong pricing power. It has passed on higher costs to consumers with reported price increases worth 8.3 per cent in the first three months of the year.
‘I’m not sure much is going to rebound, given the current economic outlook. But I don’t think you can go too far wrong buying Unilever,’ James Yardley, senior research analyst at Chelsea Financial Services.
‘It’s come off a long way from its peak (from £52 to £37 per share) and it has a decent almost 4 per cent yield which should grow. In my opinion it’s one of the remaining UK “Crown Jewels”.
‘It should be a very solid share to hold for the long term and, having fallen in price, it’s maybe a good time to it pick up.’
Extortionate food bills have been a concern among consumers this year and they’re also causing a headache for supermarkets who are unsure whether to pass increases on.
|Top 10 Risers|
|British American Tobacco||31.50%|
|Top 10 Fallers|
|JD Sports Fashion||-45.98%|
|B&M European Value Retail||-40.61%|
|Intermediate Capital Group||-37.46%|
|Source: Morningstar Direct|
As a result their shares are down in the year-to-date as the shine comes off the sector since the end of the pandemic.
Sainsbury’s shares are down 25 per cent in the past six months to around 210p while Tesco is down 12.2 per cent to 258.10p.
One of the most difficult challenges for Sainsbury’s is the intense competition in the sector, particularly by discounters Aldi and Lidl and a resurgent Tesco.
Sainsbury’s shares are trading no higher than they did in 1989 so it is clear investors are unconvinced by the group’s current strategy.
But Richard Hunter, head of markets at Interactive Investor notes: ‘For the current year, [Sainsbury’s] expects to make an adjusted pre-tax profit of £630 to £690million, which would be a decline from £730million last year.
‘More positively, costs are being attacked and the balance sheet strengthened.
‘The performance of its banking business is now moving in the right direction, while robust free cash flows enable an extremely generous dividend yield of 6.2 per cent.’
‘A recent industry survey showed that sales over the last three months had declined by almost 4 per cent, and Sainsbury’s market share dipped to 14.9 per cent from a previous 15.2 per cent.
‘The shares have declined by 21 per cent over the last year, with the market consensus of the shares as a hold comparing unfavourably with that of Tesco, which comes in at a strong buy. Even so, the company’s record of bouncing back could make it one to watch.’
Yardley also thinks Sainsbury’s share price could stage a comeback by the end of the year.
‘There has been a lot of negativity in the price about margins. However, we all need to eat and buy food.
‘The company should continue to be profitable and the UK is planning to slash import taxes on food that’s not produced domestically, which should really help with prices and the cost of living. Again, it could be a good time to pick up a critical strategic UK asset like this.’
Housebuilders have particularly struggled since the start of the year with the whole sector downgraded on inflation fears and a rising interest rate environment which puts pressure on affordability.
‘Supply chain constraints and a generally dour outlook on UK economic prospects complete the mix, despite the fact that for the most part the housebuilders continue to deliver,’ says Hunter.
Berkeley is down more than 20 per cent in the year to 3,706p despite solid growth.
‘The company’s focus on London and the South East sets it apart somewhat from many of its competitors,’ says Hunter. ‘Despite many brownfield projects and the company being responsible for 10 per cent of London’s new private and affordable homes, the average selling price remains at a heady £603,000.
Fidelity’s Tom Stevenson thinks Berkeley is a standout among housebuilders
‘Even the recent opening of the Elizabeth Line is likely to have a positive impact, with Berkeley already noting an uplift in properties along the line in London and the Thames Valley.
‘The outlook is also promising as the group aims to continue its momentum. Apart from an increase of 42 per cent in homes delivered, cash due on forward sales currently stands at £2.2billion and the group has reported a stable start to the new financial year in terms of visits, enquiries and reservations.’
Tom Stevenson, investment director at Fidelity, also tips Berkeley as a stock which could stage a comeback later this year.
‘This may seem like a strange time to be looking at investing in a housebuilder with many observers calling the top of the housing market as interest rates rise and a possible recession looms.
‘However Berkeley is the cream of the crop and best placed to capitalise on the UK’s ongoing shortage of high-quality housing.’
Is it wise to ‘buy on the dip’?
Our experts have picked some of the biggest fallers in the FTSE that they expected to rebound somewhat by the end of the year.
It might prompt you to ‘buy on the dip’, meaning you can buy up cheap shares with the expectation their share price will rise in the coming months.
This as a strategy has worked since 2009, says AJ Bell’s investment director Russ Mould, ‘but the mood music has now changed – central banks are not pumping liquidity in, but are withdrawing it instead, and global economies are stumbling.’
‘If anyone is looking to be brave and start looking for contrarians buys this could be a good time to do the necessary research, so they can lie wait if a real stock market rout breaks out.
‘As at any time in the cycle, the investor should look for a strong competitive position (which could mean the firm is a price giver and not a price taker, something that could help it during inflationary times); competent and experienced management whose interested are aligned with those of shareholders; and a strong balance sheet, ideally with plenty of asset backing and cash.
‘A net cash pile is a bonus but good interest cover (even on a mid-cycle or depressed earnings basis) is vital.
‘Then the investor can look at the stock’s valuation.
‘If the equity trades at a discount to (tangibles) net asset value then that could be a good start. A low multiple of mid-cycle earnings or cashflow could also be a useful indicator, as would a decent dividend yield, providing the payment is well covered and does not rely on a cyclical peak in earnings to be safe.’
Prudential is down more than 25 per cent since January after a torrid year for its share price. The fall in its price has largely been driven by the continued coronavirus restrictions in Hong Kong and China as well as the loss of its chief executive.
In 2021 it span off its remaining US operations and now exclusively focuses on 15 Asian and eight African countries.
It came at a difficult time given China’s zero Covid policy and the closures between the mainland and Hong Kong. Prudential’s Hong Kong sales collapsed 27 per cent last month.
But last month Deutsche Bank said Prudential offers ‘tremendous long-term value’ amid the easing of restrictions in China and Hong Kong.
It has certainly struggled to sustain momentum since losing its UK and European arms following the demerger from M&G in October 2019. But Chris Beauchamp, chief market analyst at IG, says Prudential’s broader focus on Asia ‘should see a rebound once the market has fully priced in its recession fears in the final months of the year’.
Pharmaceuticals company Halma recorded £1.5billion in profits across the year but is among the top fallers in the FTSE 100, having shed 37 per cent since the start of the year.
Its price peaked at the end of 2021 amid a wider bounce among pharmaceutical companies and is now trading at 2,028p, a similar level to April 2020.
Beauchamp tips Halma which, despite the ‘horrendous knock’, has a ‘proven record of solid earnings and revenue growth and seems to have been dragged lower in the general market turmoil without any appreciable change in business prospects.’
It has achieved 19 consecutive years of record profits and 43 years of dividend growth.
Halma has also taken advantage of lower market prices and bought 13 new companies over the period, including Ramtech and PeriGen.
6. JD Sports
JD Sports is another well-known name that has had a torrid start to the year, with shares trading down 47 per cent in the first half of the year.
This is despite a strong performance which reported a doubling of pre-tax profits in its last annual results.
Bestinvest’s Jason Hollands tips JD Sports and Future for a comeback
Jason Hollands, managing director of Bestinvest says: ‘In part, it has been caught in the crossfire of negative sentiment towards consumer discretionary businesses as inflation squeezes spending on non-essential items but it has also been under scrutiny by the Competition & Markets Authority.’
The sports retailer is facing a fine of up to £2million after the regulator provisionally found it had engaged in the price fixing of football shirts.
Hollands adds: ‘Although retailers face headwinds, which is reflected in the price, the scale of the sell-off looks unwarranted.
‘JD Sports is a high quality business. It is the second largest global distributor for both Adidas and Nike, with a high proportion of exclusivity deals with both. It has a successful M&A track record and the shares look a bargain trading on a forward P/E multiple of 9.9 x for next year.
‘While I doubt the shares will recover all their losses first half losses by year end, there is scope for a substantial appreciation form here.’
Hollands also tips mid-cap publishing group Future, which owns a number of lifestyle and hobbyist titles.
Its share price has plunged by more than half this year having peaked at the end of 2021 at 3,830p.
Shares have picked up since Future confirmed its full year guidance with a return to growth expected to continue into the second half of the year.
‘While a lot of publishers have struggled from falling advertising revenues, Future’s technology platform automatically adds links to products where it has revenue sharing arrangements and these update depending on stock availability,’ says Hollands.
‘As consumers become more cost conscious and with ongoing supply chain disruptions, this type of dynamic advertising technology is particularly advantageous. The bearish outlook for consumer facing stocks looks fully factored into the stock price now.’
8. Scottish Mortgage
Scottish Mortgage is the country’s biggest investment trust and has made big profits for investors by investing in a mix of global tech stocks, like Amazon, and startups.
But rising interest rates, a difficult geopolitical backdrop and a struggling Chinese economy, mean its shares have taken a beating. It is down more than 40 per cent in the year-to-date.
Stevenson says: ‘The recent performance of the trust is not because the management team has backed poor companies. In fact, the operational performance of the holdings in the portfolio has remained sound.
‘The share price weakness is a result of the way these holdings have been valued by the market.
‘The group’s Chinese holdings have been impacted by regulatory intervention and fears over the country’s growth prospects.’
High growth tech shares, particularly those listed in the US, have meanwhile been sold off as interest rates rise and reduce the value of future earnings.
‘The climate of higher interest rates and inflation isn’t going away, so anyone expecting a V-Shaped recovery for Scottish Mortgage is likely to be disappointed.
‘But the companies in which it invests still have great growth potential as technology continues to embed itself in all areas of our lives. Moderna’s MRNA technology, for example, may have wide-ranging potential uses in the treatment in a range of diagnoses.
‘The Scottish Mortgage Investment Trust is sticking to its investment philosophy, seeking to uncover exceptional companies.
‘It is less troubled by downside risk than some of its peers, believing that fund managers’ time is better spent finding great companies of the future as it did with businesses like Amazon or Tesla, companies with the potential to grow to many times their current size.
‘The outsized gains it makes on these companies will more than compensate for others where the ambitions are not fulfilled.’