Investment Insider: Be smart over shares as economy recovers

Choose carefully and you may benefit as we come out of recession

No one has yet been brave enough to suggest "green shoots" of recovery, just in case they turn out to be advanced mould. But as private investors we can afford to look a little further ahead than cautious politicians. After all, waiting for a recovery to be fully entrenched before investing might mean having to pay more for our shares. That said, it pays to be cautious.

You would think that as businesses come out of a recession, the future would start to look brighter as profits and cash swell those depleted coffers. However, emerging from a slowdown can sometimes be more perilous than entering an economic downturn. That's because as companies enter recession, they tighten their belts and trim output in line with reduced demand. In other words they downsize and dispose of underperforming businesses to conserve cash. That's the easy part.

The difficulty comes when companies need to cope with increased demand after a recession. Some may find that, as a result of over-prudence, they could be faced with insufficient production capacity and shortage of working capital.

They may also find that better-positioned and better-financed competitors might start to eat away at their share of the market. Consequently, it is important to focus on companies that have adequate working capital.

Banks are an obvious recovery share. If you haven't already noticed, banks have been extra prudent over the last few years, much to the annoyance of the Government. They have been reluctant to lend and instead chosen to rebuild their balance sheets in readiness for the recovery. They understand better than most that economies cycle through booms and busts. They were badly wounded by the downturn but are also best positioned for a recovery. Banks are also in a good position to cope with the eventual interest rate rises. They will simply pass on the higher cost of borrowing to their customers. The UK's largest banks, including HSBC and Barclays, are expected to post higher profits this year and next.

House builders are another sector that could emerge stronger from recession as demand for new homes improves with rising consumer sentiment. According to figures from the Council of Mortgage Lenders, gross mortgage lending in the first three months of this year, although down significantly from its peak in 2007, has been on the rise over the last three years. Persimmon, which was recently promoted to the FTSE 100, and Barratt Developments are both expected to report respectable increases in profits over the next couple of years.

An end to recession may also see a rise in demand for commercial office space as businesses dip a tentative toe into expansion. London-focused Workspace Group is a Real Estate Investment Trust, which means that it must distribute at least 90 per cent of its income as dividends to shareholders. Profits are expected to be flat next year but they could bounce higher the year after. In the meantime, investors could enjoy a dividend yield of around 2.7 per cent. Regus provides flexible workspace for businesses not only in the UK but around the world too. Profits were hit badly following the financial crisis. However, its recovery has been almost as spectacular as its deterioration. Profits are expected to return to pre-crisis levels within the next two years.

David Kuo is director of fool.co.uk

Compare with the Independent: See how much you could save by switching credit cards. Compare now

News
peopleActress speaks out against historic sexual assault claims, saying things have 'gone quite far now'

Arts & Entertainment
A stranger calls: Martin Freeman in ‘Fargo’
tvReview: New 10-part series brims with characters and stories

Arts & Entertainment
Shaun Evans as Endeavour interviews a prisoner as he tries to get to the bottom of a police cover up
tvReview: Second series comes to close with startling tale of police corruption and child abuse
Sport
Raheem Sterling and Luis Suarez celebrate during Liverpool's game with Norwich
football Another hurdle is out of the way for Brendan Rodgers' side
VIDEO
Life & Style
Guests enjoy food and cocktail parings by Chefs Jimmy Bannos, Jimmy Bannos Jr, Daniel Rose and Mindy Segal with mixologists Josh King and Alex Gara at Bounty & Barrel: A Jack Daniel's Single Barrel Dinner Series at Heaven on Seven on April 9, 2014 in Chicago, Illinois.
news Sprinkle Palcohol 'on almost any dish' for 'an extra kick' firm says...
Arts & Entertainment
Charlotte Brontë, the English novelist, poet and the eldest of the three Bronte sisters who lived into adulthood, has been celebrated with a Google Doodle depicting her most famous novel, Jane Eyre.
arts + ents "Reader, they doodled her".

Arts & Entertainment
Schwarzenegger winning Mr. Universe 1969
arts + entsCan you guess the celebrity from these British Pathe News clips?
News
Portrait of Queen Elizabeth-II by David Bailey which has been released to mark her 88th birthday
peoplePortrait released to mark monarch's 88th birthday
Arts & Entertainment
The star of the sitcom ‘Miranda’ is hugely popular with mainstream audiences
TVMiranda Hart lined up for ‘Generation Game’ revival
Life & Style
The writer, Gerda Saunders, with her mother, who also suffered with dementia before her death
healthGerda Saunders on the most formidable effect of her dementia
Arts & Entertainment
Oxegen in Ireland has been axed as promoters decide it is 'no longer viable'
arts + ents Promoters have axed the event as it is 'no longer viable in current form'
News
The troubled star is set to give fans the biggest insight into her life away from the headlines
people Star made the announcement during the final episode of the programme, entitled Lindsay
News
YouTube clocks up more than a billion users a month
mediaEuropean rival Dailymotion certainly thinks so
Arts & Entertainment
The original design with Charles' face clearly visible, which is on display around the capital
arts + ents
Arts & Entertainment
‘Self-Portrait Worshipping Christ’ (c943-57) by St Dunstan
books How British artists perfected the art of the self-portrait
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Database Team Lead ( Leadership, Sybase, Computer Science)

    Negotiable: Harrington Starr: Database Team Lead ( Leadership, Sybase, Compute...

    C#.NET Delphi SQL Developer (C#,DELPHI,SQL)

    £40000 - £50000 per annum + Bonus+Benefits+Package: Harrington Starr: C#.NET D...

    VB.NET SQL Junior-Mid Level Developer (VB.NET,SQL,Excellent com

    £25000 - £35000 per annum + Bonus+Benefits+Package: Harrington Starr: VB.NET S...

    Trade Support, Application Support, Operations Analyst, CRM MS

    £45000 - £55000 per annum + Bonus and Benefits: Harrington Starr: Trade Suppor...

    Day In a Page

    Rubin ‘Hurricane’ Carter: The man who could have been champion of the world - and the Bob Dylan song that immortalised him

    The man who could have been champion of the world

    Rubin ‘Hurricane’ Carter and the Bob Dylan song that immortalised him
    Didn’t she do well?

    Didn’t she do well?

    Miranda Hart lined up for ‘Generation Game’ revival
    The Middle East we must confront in the future will be a Mafiastan ruled by money

    The Middle East we must confront in the future will be a Mafiastan ruled by money

    In Iraq, mafiosi already run almost the entire oil output of the south of the country
    Before they were famous

    Before they were famous

    Can you guess the celebrity from these British Pathe News clips?
    Martin Freeman’s casting in Fargo is genius

    Martin Freeman’s casting in Fargo is a stroke of genius

    Series is brimming with characters and stories all its own
    How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

    How I brokered a peace deal with Robert Mugabe

    Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
    Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

    British Muslims's Happy video attacked as 'sinful'

    The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
    Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

    Michael Williams: Do as I do, not as I pray

    Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
    A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

    A History of the First World War in 100 moments

    A visit to the Front Line by the Prime Minister's wife
    Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

    Jenny Collier: 'Sexism on stand-up circuit should be extinct'

    The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
    Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

    Cannes Film Festival

    Ken Loach and Mike Leigh to fight it out for the Palme d'Or
    The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

    The concept album makes surprise top ten return

    Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
    Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

    Lichen is surprise new ingredient on fine-dining menus

    Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
    10 best baking books

    10 best baking books

    Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
    Jury still out on Manchester City boss Manuel Pellegrini

    Jury still out on Pellegrini

    Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players