Every economic cloud has a silver lining
The Government is set to slash public spending but there are always bright spots on the horizon. Julian Knight investigates
Tuesday 25 May 2010
It's hardly a secret, but an unprecedented squeeze on public sector spending is about to take place to help reduce Britain's mammoth deficit.
With the NHS and international development spending ring-fenced, some departments could, eventually, see their budgets fall by anything up to 25 per cent – and that's without the further hit of inflation currently running at over 5 per cent a year. Job losses are inevitable, as are cutbacks in consumer spending; and there is the chance that if cuts are too deep, the economy could slip back into recession. This is doom-laden stuff, but when it comes to investing, there is always a winner when there is a loser, a flipside to every story.
When it comes to public sector spending cuts, the same is true, it seems. There are businesses set to benefit and fund managers well placed to make a killing. "Even with major cuts, there are companies and sectors which should come out of it pretty well," says Mick Gilligan, a partner at the stockbroking firm Killik & Co. "Take outsourcing companies, for instance. The Government is going to want to move stuff off its balance sheet, which means employees being transferred from the public to the private sector. This is where outsourcing comes into play," he adds.
Mr Gilligan identifies five major companies in the outsourcing sector which have potential for growth. "Capita, Serco, Mitie and Mears should all attract additional business, but this is already priced into the stock; Capita, for instance, is trading at 19 times its revenues, compared to a FTSE average of 10.5.
"However, the fifth outsourcing company, Interserve, is an interesting proposition; it is involved in the construction industry, which has suppressed its share price, so it's trading at five and half times revenue but is paying a dividend of 3 per cent."
Food retailers may also do better, as people focus on the basics. "The Marks & Spencers of this world may not do quite so well, and the same goes for the electrical retailers, but I'd expect core food retailers to be OK. Tesco, for instance, is very well placed for more austere times," Mr Gilligan adds.
David Kuo, director of the financial advice website Fool.co.uk, says the shift back to basics will encompass clothes, too "I see Primark, owned by Associated British Food, as a potential winner, despite its recent unappetising dividend payout."
In difficult times, Mr Kuo says consumers often fall back on simple pleasures: "Smokers may trade down, but they are unlikely to give up the habit. So tobacco firms and cigarette makers should continue to enjoy buoyant sales. Consider Imperial Tobacco and British American Tobacco. Both pay dividends of more than 5 per cent." Gambling is also a potential growth area: "More people are likely to chance their hand when times get hard. This bodes well for bookies which could see a boost in both internet traffic and footfall," Mr Kuo adds. Pawnbroking firms, which have already had a strong recession, may continue their growth.
More conventionally, the ring-fencing of NHS spending could provide a fill-up to the pharmaceutical sector: "People are still going to get ill [which] puts pharmaceutical companies in an enviable position," says Darius McDermott, managing director at Chelsea Financial Services. GlaxoSmithKline and Astra Zeneca are standouts in this sector identified by Mr Kuo.
Elsewhere, utility companies – gas, electricity and water – are often seen as a safe haven in a storm. "These companies enjoy a regular stream of revenue, which makes them particularly attractive in tougher times. Centrica, National Grid and United Utilities look attractively priced," Mr Kuo adds.
If the Government does get to grips with the public sector deficit and interest rates start to rise – which seems likely, as they are currently at a historic low of 0.5 per cent – then the pound should strengthen, which is something investors should build into their calculations when deciding where to look for investment growth: "It is obvious that austerity is not good for most corporate sectors. But it will be good for the value of the pound, so firms which import most of their raw materials will do better," says Jane Foley, research director at the currency broker Forex.com. "Sectors which could benefit from this could be transport companies which import oil, gas companies and utilities; but remember many of the firms that import also export, so manufacturing, for example, may see little benefit from an appreciating pound," she adds.
Investors nervy about investing may do best identifying a fund manager with a track record of steering a profitable course through difficult times. "Funds spread risk by offering a more diversified exposure to the market; one manager with a enviable record and positioned in sectors that may do well is Neil Woodford's Invesco Perpetual UK Equity Income Fund," Mr Gilligan says. A fan of this fund, Mr McDermott also likes the look of the Framlington Health Fund and Artemis Strategic Assets Fund managed by William Littlewood. "I like the fact that his fund uses futures extensively, so he can make money when share prices and currencies actually fall. At times like these, when we are looking at a new austerity, it's important to look for a manager nimble on his feet and able to take advantage of short-term shifts in the market, as well as someone like Woodford who buys and holds good, dividend-paying companies for the long term," he says.
- 1 Germanwings crash: Police make 'significant discovery' at home of co-pilot Andreas Lubitz
- 3 Zayn Malik already working on solo material, just days after quitting One Direction
- 4 The West has it totally wrong on Lee Kuan Yew
- 5 #FreeTheNipple: Women in Iceland bare breasts in solidarity with trolled student
Nigel Farage brands LGBT activists 'filth' and 'scum' and accuses them of scaring away his children after they invade his local pub
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
JK Rowling responds to fan tweeting she 'can't see' Dumbledore being gay
Russia threatens Denmark with nuclear weapons if it tries to join Nato defence shield
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Germanwings plane crash live: Andreas Guenter Lubitz intentionally crashed flight 9525 into the Alps in act of mass murder and suicide – latest
iJobs Money & Business
Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...
Negotiable: Recruitment Genius: You will be the first point of contact for all...
£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...
£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...
Day In a Page
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station