Last year is generally considered to have been bad for the economy, what with a double-dip recession, but stock markets tell a very different tale about 2012 and it’s against this backdrop that my stock selections for 2013 are now due.
And what better timing than after Wednesday’s ripsnorter in the markets?
The FTSE 100 is up 7.4pc since my 2012 tips were published on January 9 last year. If the often substantial dividends paid out by the cash-rich companies that make up the index had been reinvested in those same companies’ shares, then the total return on the FTSE 100 (FTSE: ^FTSE - news) would have risen to 12.2pc.
It’s also generally overlooked that, with dividends reinvested, the FTSE 100 is well ahead of the oft quoted 6,930 level hit at the end of December 1999, which, on a simple price appreciation basis, the index has failed to regain since. But, with income reinvested, the FTSE 100 comfortably broke into record territory (again) during 2012 and stands at more than 8,700 on a total return basis over the past 10 years.
Just as notable is the FTSE 250 (FTSE: ^FTMC - news) , considered a more accurate reflection of domestic, UK-orientated companies than the more international-flavoured FTSE 100. The FTSE 250 is up 23pc since January 9 last year and 27pc on a total return basis.
Such a positive investment narrative for employers is at odds with the UK’s moribund GDP statistics and the stale political arguments over austerity. It confirms what has been true for several years. At an individual level, private sector companies have had a different outlook for their own prospects than that for the country as a whole, part of the strange crisis psychology gripping the nation.
But stock markets are generally forward-looking indicators too, so a good 2012 performance suggests that much of the more benign environment I’m assuming for 2013 may already be priced into shares. However, many of the conditions witnessed 12 months ago still pertain, so stock market investors stand a good chance of making progress again this year.
Government bonds are overpriced thanks to ultra-loose monetary policy, including quantitative easing (money printing), resulting in negative real returns from these investments. Gilt yields, for instance, were 2pc a year ago and are now 1.9pc, while official Bank Rate remains at 0.5pc. Inflation, as measured by RPI, is down from 5.2pc a year ago to 3pc, but is starting to rise again and actual inflation experienced by individuals remains much higher than official statistics suggest, while at the same time wage and salary growth remain well below the growth in prices.
So investors are still seeking the same combination of both higher yields than government bonds can deliver and a hedge against prices. Generally I’m assuming a more benign set of overall circumstances for the next 12 months than those we battled through last year, with the world’s two largest economies the US and China set to finish 2013 with growth rates ahead of last year’s, based in part on stronger consumer spending.
It’s impossible to discount a major conflict in the Middle East derailing progress and sending the oil price higher, although America’s improving energy mix insulating it from such shocks would become more apparent.
Growth will once again come from regions outside Europe, and UK-based investors are blessed with a huge choice of companies that can benefit from this trend, although certain companies reliant on the UK for growth shouldn’t be discounted either.
A year ago I tried to persuade readers that there was hope for investors despite the pervading gloom after a difficult 2011 in the markets. I suggested five stocks for a five-year investment that all had balance sheet strength to maintain dividend payments and offer decent growth prospects to help preserve capital. They were Murray International, Vodafone (LSE: VOD.L - news) , BAE Systems, HSBC (LSE: HSBA.L - news) and RSA, the insurer.
One year in, how have they done? The portfolio is up 14.8pc or, with dividends reinvested, 21.6pc. This compares with the FTSE 100’s 7.4pc rise or a total return of 12.2pc, so a good out-performance.
Star of the show was HSBC’s 39.8pc total return, followed by BAE Systems (LSE: BA.L - news) (29.6pc) and RSA (28.5pc). Next (Other OTC: NXGPF - news) up was Murray International (17pc), an investment trust with typically low management fees but giving access to a focused portfolio of 51 international companies that fund healthy dividends and display strong growth records.
I myself tuck away the shares every month in an Isa reinvesting dividends, naturally and am therefore investing in the likes of Taiwan Mobile, Kimberly-Clark de Mexico, PetroChina and Tenaris (Milan: TEN.MI - news) , the steel tubes maker.
The one faller in the “five for five” portfolio was Vodafone, which is off 7pc after dividends were reinvested. I don’t intend recommending selling the stock as its strategy is the right one, assuming certain improvements in execution, and deserves longer.
I’m also sticking with the other four stocks in the portfolio.
So what’s new for this year? While I’m pleased with the 2012 portfolio, there are plenty of other opportunities, of course.
Wolseley (£30.08), the world’s largest heating and plumbing equipment supplier, had a strong 2012 largely because of an anticipated housing recovery in the US. That’s likely to continue and while I don’t imagine we’ll see another 45pc total return from the company, it’s one way to play a US recovery.
Unilever (£23.92) is making progress in tilting its growth profile more towards emerging markets and is a solid, blue-chip way of gaining exposure to changing consumer habits in these fast-changing countries.
BT (237.3p) is an interesting company, now making material changes to its make-up thanks to its investment in pay-TV and the continued recovery from previous shocks such as problems with its global services division.
An alternative investment trust I’d recommend is another Reece household favourite, British Empire Securities and General. A growth portfolio for the long term.
So, happy hunting, and don’t forget the power of dividend reinvestment.