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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Life and Style
Sainsbury's could roll the lorries out across its whole fleet if they are successful
tech
Arts and Entertainment
tv
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmHe was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
Arts and Entertainment
'Old Fashioned' will be a different kind of love story to '50 Shades'
film
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Arts and Entertainment
Smart mover: Peter Bazalgette
filmHow live cinema screenings can boost arts audiences
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
News
i100
News
Prince Harry is clearing enjoying the Commonwealth Games judging by this photo
people(a real one this time)
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Project Manager (HR)- Bristol - Upto £400 p/day

    £350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

    Graduate / Trainee Recruitment Consultant - IT

    £25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

    HR Business Partner - Banking Finance - Brentwood - £45K

    £45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

    PA / Team Secretary - Wimbledon

    £28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

    Day In a Page

    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
    How live cinema screenings can boost arts audiences

    How live cinema screenings can boost arts audiences

    Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
    Shipping container hotels: Pop-up hotels filling a niche

    Pop-up hotels filling a niche

    Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
    Native American headdresses are not fashion accessories

    Feather dust-up

    A Canadian festival has banned Native American headwear. Haven't we been here before?
    Boris Johnson's war on diesel

    Boris Johnson's war on diesel

    11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
    5 best waterproof cameras

    Splash and flash: 5 best waterproof cameras

    Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
    Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

    Louis van Gaal interview

    Manchester United manager discusses tactics and rebuilding after the David Moyes era
    The children were playing in the street with toy guns. The air strikes were tragically real

    The air strikes were tragically real

    The children were playing in the street with toy guns
    Boozy, ignorant, intolerant, but very polite – The British, as others see us

    Britain as others see us

    Boozy, ignorant, intolerant, but very polite
    Countries that don’t survey their tigers risk losing them altogether

    Countries that don’t survey their tigers risk losing them

    Jonathon Porritt sounds the alarm
    How did our legends really begin?

    How did our legends really begin?

    Applying the theory of evolution to the world's many mythologies
    Watch out: Lambrusco is back on the menu

    Lambrusco is back on the menu

    Naff Seventies corner-shop staple is this year's Aperol Spritz