In putting together our portfolio for 2007, we have taken the view that the year ahead will be another positive one for the stock market, although probably not as good as the one we have just had.
Accordingly, this year's Independent Portfolio has focused on companies with solid earnings streams and good growth prospects. The hope is that they will weather the turbulence usually seen in financial markets at this late stage in the economic cycle.
The risks facing investors are very clear. On a geo-political level, any significant escalation of the conflict in the Middle East is very likely to prompt a swift retreat by stock markets, as is a major terrorist attack. The precarious stage of the US dollar is another concern, as is the bursting of the private equity bubble which has seen many companies in the private arena loaded with record amounts of debt.
Given our slightly cautious view, we have a bias towards large companies in this year's portfolio. And they don't get much bigger than GlaxoSmithKline. In 2006, the drugs giant actually saw its shares lose ground. This year we are betting on a recovery as the company launches a series of new treatments, including Tykerb for lung cancer and Cervarix, a vaccine for cervical cancer.
Royal Bank of Scotland is another UK corporate giant well placed to ride out any storms in the financial markets. There are also company specific reasons why we are backing the bank. It trades at a sizeable discount to the wider sector, which is totally uncalled for. RBS is a superbly run outfit, one that should be able to repeat last year's trick of delivering a 25 per cent increase in its dividend to shareholders and a £1bn share buyback in 2007. Readers can expect re-rating of RBS stock.
Bookmakers tend to do well whatever the wider economic conditions. However, there are plenty of opportunities for Ladbrokes to deliver growth for its shareholders over the next 12 months. Its international expansion strategy is certainly the most exciting in the sector. Last month, it secured gaming licences from the Italian government which will allow the group to open 142 new betting shops in the country. Italy, which is in the process of deregulating its betting industry, is widely seen as Europe's second most lucrative market for bookies after the UK.
A takeover of Ladbrokes is also on the cards - CVC Partners, the private equity house, is widely reported to be interested in the company.
Again in the gaming sector, PartyGaming is by far the most risky stock we are recommending this year. It lost over two thirds of its value in 2006 after internet gambling was outlawed in the US. This has left the sector badly in need of consolidation and PartyGaming, as the biggest player, is likely to lead the way on this front over the coming months.
The mining giant Anglo American could also prove to be a volatile share if metals prices come under pressure. So far it has not joined in the mania for making large acquisitions. All that might be about to change, after the company appointed Cynthia Carroll as chief executive. She starts work in March and the big task in front of her is to do a big deal. Failing that, however, there is a very good chance that Anglo American will itself fall to a predator, with the big Russian groups among the likely buyers.
BSkyB's chief executive, James Murdoch, has shown himself to be a chip off the old block, with some bold moves worthy of chairman and daddy Rupert Murdoch. First he upped capital expenditure at Sky and revamped its marketing approach. Then, in 2006, he took Sky into broadband and surprised many in the City with the purchase of an 18 per cent stake in ITV - in the process sinking rival NTL's plan to buy the broadcaster.
This year ought to show how successful Sky is going to be in the fiercely competitive broadband market and how useful that will be for driving its television subscriptions. On past performance, Sky is likely to emerge as winner among the broadband players, with its customary brilliant marketing and execution. Sky shares have gone nowhere under James. This could be his year.
In the publishing segment of the media industry, United Business Media looks to be the most impressive operator. Disposals, including the NOP market research business, have left UBM as net cash positive and a very focused business. Management, under chief executive David Levin, is returning money to investors and looking for bolt-on acquisitions. The company's strategy is to build "verticals" in very specialist business-to-business niches. That is, serve well-defined communities, in particular sectors with publications and conferences. It may not be the most exciting part of the media industry, but it is very profitable.
Not only is Experian, the credit expert spun out of GUS in October, largely immune from the state of the wider economy, but it is operating in a fast-growing market and trades at a discount to its peers in the US. The group is best know for its credit services - collating credit scoring data from financial institutions and then reselling it to them when they want to decide whether or not to lend money to an individual. Having been in the market for 30 years, Experian has become a brand which big banks can trust.
Meanwhile, Millennium & Copthorne is a great asset play. The group actually owns the freeholds to most of the hotels it manages, and has relatively little debt, making it an ideal target for a financial buyer. Even without a bid, investors are likely to soon wake up to the value behind the stock in 2007.
Finally, we are tipping Xansa once again. It failed to perform last year, falling 3 per cent, but we are convinced that this will be the year that the City finally realises its potential. The IT outsourcing specialist was one of the first to invest in building a presence in India, where it got involved during the late 1990s. These days over half its staff are located in the country. With growing numbers of Western companies looking to outsource non-core parts of their business, like IT, to the region, Xansa should be a winner.
With regard to The Independent's 2006 portfolio, we easily outperformed the stock market, and also managed to beat the Child's tips. £10,000 invested in our 10 recommendations would be worth £13,300 today, while if it had been placed in a fund tracking the FTSE All Share it would be worth only £11,310.
Datamonitor, a fabulous business providing market research, was our top performer, notching up a 92 per cent gain. It consistently beat analyst expectations, as did Kier, the construction group.
Kazakhmys was boosted by the soaring copper price. It mines the red metal in Kazakhstan.
Despite a late surge, FKI disappointed. For the whole of 2006 it traded at a steep discount to the wider engineering sector, and this gap only narrowed slightly when the company effectively put itself up for sale in November.
GUS, which demerged Experian from its retail business, also failed to impress, and saw its shares drop 2 per cent on the year. However, the catering giant Compass did exactly what we hoped it would. After a torrid 2005, when it issued a string of profit warnings and became embroiled in a scandal over the way it won contracts with the United Nations, it recovered its poise in 2006.Reuse content