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
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Life and Style
food + drink
News
i100
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

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Could cannabis oil reverse the effects of cancer?

    Could cannabis oil reverse effects of cancer?

    As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
    The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

    The Interview movie review

    You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
    Serial mania has propelled podcasts into the cultural mainstream

    How podcasts became mainstream

    People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
    Jesus Christ has become an unlikely pin-up for hipster marketing companies

    Jesus Christ has become an unlikely pin-up

    Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
    Rosetta space mission voted most important scientific breakthrough of 2014

    A memorable year for science – if not for mice

    The most important scientific breakthroughs of 2014
    Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

    Christmas cocktails to make you merry

    Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
    5 best activity trackers

    Fitness technology: 5 best activity trackers

    Up the ante in your regimen and change the habits of a lifetime with this wearable tech
    Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

    Paul Scholes column

    It's a little-known fact, but I have played one of the seven dwarves
    Fifa's travelling circus once again steals limelight from real stars

    Fifa's travelling circus once again steals limelight from real stars

    Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
    Frank Warren column: 2014 – boxing is back and winning new fans

    Frank Warren: Boxing is back and winning new fans

    2014 proves it's now one of sport's biggest hitters again
    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas