These are tough times to be an investor as stock markets shake the world by crashing one day then rebounding the next.
Analysts cannot agree whether this is a short-term panic or a sign of impending global economic meltdown.
Stock markets may look scary right now, but plenty of businesses will continue to shine even in the darkest times.
Experienced investors like to buy at times like these, because they can pick up shares in solid companies at a fat discount, then patiently wait for market storms to pass.
If you buy with the intention of holding for the long term you could eventually find you have bagged a bargain.
Over five, 10 or 20 years, stocks and shares should outperform cash. With many companies paying dividends worth between 3 and 5 per cent a year, you can also get a higher rate of income, which you can reinvest back into the stock to turbocharge growth. Remember, dividends aren’t guaranteed and depend on company performance.
If you are brave, or crazy, enough to buy individual stocks and shares, here are some top expert picks:
Fast food and soft drinks
Chris Beauchamp, a senior market analyst at IG Index, which has just opened an office in Dubai, picks out an old investor favourite, the US fast food giant McDonald’s.
“People keep saying its glory days are over and it will fall victim to healthy eating trends, but the company continues to defy the sceptics,” he says.
Rivals such as Shake Shack and Chipotle have threatened to take a bite out of its market share, but McDonald’s continues to power on.
Global sales rose 5 per cent over the last year, according to its fourth-quarter results, helped by the launch of all-day breakfasts.
“McDonald’s still serves up strong revenue and its dividend currently offers an attractive yield of 3.05 per cent a year,” Mr Beauchamp says, adding that he also rates the global food and soft drinks company PepsiCo, whose brands include Pepsi, Tropicana, Gatorade and Quaker Oats, and has also posted a steady, downturn-defying performance.
“Its share price has held firm during recent volatility and it pays a fizzy yield of 2.90 per cent a year.”
Household goods
Another way to play emerging markets is to invest in household goods giants such as Reckitt Benckiser Group, Mr Beauchamp says.
You may not recognise the company name, but you almost certainly have several of its everyday brands in your kitchen and bathroom cupboards, such as Dettol, Harpic, Finish, Nurofen, Strepsils and Vanish.
“Reckitt Benckiser’s products may not be the most exciting in the world, but in these trying times a firm that beats expectations and has just set out a guardedly confident forecast for the year ahead deserves a warm reception,” says Mr Beauchamp.
The company’s share price has risen 90 per cent over the past five years as emerging market consumers switch over to western brands. “Reckitt’s 2.20 per cent yield and dependable revenue streams make it a compelling proposition for investors seeking a haven from market turmoil.”
Mr Beauchamp rates Reckitt’s rival Unilever as well, another global consumer goods giant listed in the UK, whose top brands include Comfort, Dove, Flora, Hellmann’s, Lipton, Knorr, Wall’s, Timotei and Vaseline. The stock currently yields 2.95 per cent.
The Dutch-owned electronics company Philips is also a solid stock, in Mr Beauchamp’s opinion, with steady revenues and strong emerging market sales that should help to drive profit when Asia recovers from its recent troubles.
Defensive stocks
Lewis Grant, senior portfolio manager of the Hermes Global Equity Fund, says so-called “defensive” stocks can thrive amid continuing market volatility. “They can provide a haven of resilience in particularly choppy markets but with enough potential upside if the current slump proves short-lived.”
The falling oil price may be hitting the Middle East, but it has put money into the pockets of western consumers, particularly the US, and this will boost sales at low-cost retail chains such as Dollar Tree and Dollar General.
“Dollar Tree now has almost 14,000 stores across the US and Canada and has the potential for significant expansion, with a long-term target of 20,000 stores,” says Mr Grant.
Health care
Another defensive sector that tends to hold firm in difficult times is health care, according to Mr Grant, and a number of pharmaceutical and biotechnology firms boast strong balance sheets and healthy long-term prospects
He picks out the US-based biotechnology firm Amgen and Swiss pharmaceutical company Roche. “Their size, diversified product offerings and relatively cheap valuations make them two of the most attractive healthcare names as the market slows down.”
The financial expert particularly favours Roche. “It is priced like a traditional pharmaceutical company but with a large and increasing biotech exposure that could command a significantly higher valuation.”
Utilities and insurance
Utility companies also offer resilience during difficult times, as they generate a steady income stream from everyday services that most people still pay for even in a downturn, such as gas, electricity and water.
“Unlike, say, buying a new car or appliance, utilities are essential and cannot be put off,” Mr Grant points out.
He tips American Water, the largest publicly traded water utility in the US, which provides regulated water services to 20 states. “It has delivered consistent growth in recent years and has the potential to continue this through increased investment in infrastructure as well as via acquisitions. We view this company as a fantastic long-term opportunity with limited exposure to a market slowdown,” Mr Grant explains.
Michael Clark, portfolio manager of the Fidelity MoneyBuilder Dividend and Enhanced Income Fund, also picks out a utility company, UK-based Severn Trent.
He says regulated utility prices offer investors the security of a “visible” future income stream. “Utilities also pay a reliable dividend income, for example, Severn Trent currently yields more than 3.5 per cent.”
Mr Clark also recommends Legal & General Group, a UK-based insurer and asset manager with global ambitions.
The company specialises in running low-cost tracker funds and is now looking to expand in the US and other global markets. “L&G generates plenty of crash, and yields a healthy 5.5 per cent a year, which I expect to increase by around 10 per cent a year for the next three years.”
Telecommunications
Stuart Mitchell, manager of the SWMC European Fund, names the mobile phone giant Orange as one of his favourite stocks, as he is impressed by the strength of its franchise.
Mobile phones have gone from a luxury to being an everyday essential and Mitchell says Orange has a bright future as management works hard to cut costs, European authorities reduce the regulatory burden on the sector, and 4G coverage on the continent catches up with the US.
Oil and commodities
These stocks have been hit hardest of all in the downturn as Chinese demand falls while supply stays high.
It would be a brave call to buy a mining company today given the meltdown in the sector during which Anglo American has shed about 70 per cent of its value over the past year, and BHP Billiton has fallen 50 per cent.
Few would be willing to take a chance on oil companies either, but if the oil price does recover later this year as some analysts forecast, now could prove a great time for brave investors to buy.
The UK-listed oil major BP has fallen 25 per cent over the past year, but it could rally sharply if the oil price recovers.
Helal Miah, an investment research analyst at Share.com, says BP’s recent full-year results showed underlying profits more than halving from just over $12 billion to $5.9bn. The company’s upstream oil and gas production operations were inevitably punished by the falling oil price, although other parts of the busivness performed better.
Mr Miah says plunging profits are hardly a surprise given the oil price collapse and BP could recover rapidly when oil does. “It remains a contrarian play on the oil recovery for investors willing to accept a higher level of risk,” he adds.
Be warned, some experts reckon the oil price could have further to fall, with Goldman Sachs suggesting oil could even drop as low as $20 before the sell-off finally ends, which would inflict further damage on BP’s share price.
BP currently offers an eye-catching yield of nearly 8 per cent but management could be forced to cut the dividend if the oil price continues to stay low, which would also hit its share price.
Gold
One commodity has shown promise during the recent volatility – gold. The precious metal is the ultimate safe haven in times of trouble and while stock markets have crashed, its price has risen around 15 per cent over the past month to over $1,200 an ounce.
Russ Mould, investment director at the specialist pension advisers AJ Bell, says that rather than buying physical gold you could the invest in the stock of a gold miner such as Randgold Resources instead.
Randgold has mining operations in West and Central Africa and Mr Mould says it has been the best-performing stock on the FTSE 100 over the past six months, with its share price up 38 per cent in that time.
“In contrast to pain-racked miners, Randgold recently announced falling costs, a healthy balance sheet and a 10 per cent increase in its final dividend,” says Mr Mould.
The firm also posted record production of more than 1.2 million ounces of gold, which should give profits a further boost. Mr Mould adds: “If the gold price continues to rise, Randgold is poised to capitalise.”
Be warned, gold can be volatile – it is still well below its peak of $1,900 an ounce, which it hit in 2011. Investors who bought at the top of the market are still nursing major losses.
Buying individual companies is risky, even so-called defensive stocks, as you could suffer big loses if your stock pick flops or goes bust.
Only experienced investors who already have a well-balanced portfolio containing mutual funds, bonds, cash and property should chance their hard-earned money on direct equities.
Don’t be too clever and try to time the market, even the experts cannot do that with consistent accuracy. Instead, look to hold for a longer period to allow you to overcome the kind of short-term volatility we are seeing today.
Investment trusts cover the bases
Tom Anderson, an investment adviser at Killik & Co in Dubai, says there is another type of stock market listed company you can invest in that reduces the risk from buying individual companies.
Investment trusts, also called investment companies, are similar to mutual funds in that they invest in a spread of different companies to reduce the damage caused if one company fails.
The twist is that they are also companies themselves, which are traded on the stock market like any other share. Here, Mr Anderson picks out three solid investment trusts that should give you a good spread of different stocks:
1. Rothschild Capital Partners
This is a global growth trust designed to invest the wealth of the Rothschild family, which ordinary people can invest in as well. “It invests in a diversified international portfolio, which includes public and privately-listed equity, absolute return, credit, currencies and cash,” says Mr Anderson. “It can also hold cash while offering a 2 per cent dividend yield.”
• The fund is up 46 per cent over the past three years and 30 per cent over five years, according to Trustnet.com.
2. Scottish Mortgage Investment Trust
Ignore the name, this has very little to do with either Scotland or mortgages, Mr Anderson says. “It looks for businesses that have a sustainable competitive advantage and are capable of growing at a faster rate than the market average.” The fund targets companies in fast-moving area such as e-commerce, social media, health care, transportation and energy. Major holdings include the online retailer Amazon, Chinese search engine Baidu, social media site Facebook and electric vehicle designer Tesla Motors.
• The fund is up 43 per cent over three years and 65 per cent over five years.
3. Personal Assets Trust
This cautious, low-risk fund aims to deliver capital and income growth from shares, bonds, cash, gold and other instruments.
• It has returned 5 per cent over three years and 25 per cent over five years.
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