Entering 2024, political uncertainty dominated the outlook. With a Labour majority confirmed here and Donald Trump back in the White House, those questions are in the rear-view mirror. But the investment environment, at least in the UK, remains the same. Valuations are still near historic lows and takeover activity remains rife.
The broader macroeconomic environment appears to be settling into a pattern of moderate growth as central banks remain in rate-cutting mode. Consensus projections hover around 1.3 per cent real GDP expansion for the UK this year, outpacing some European economies but trailing the US.
On the flipside, inflation appears to be ticking back up, the Budget has dented both business and consumer confidence, and the potential impact of US tariffs on UK exports looms large. Even so, brokers have plenty of options to play to these scenarios with both fund and stock picks.
The usual word of caution: brokers often have ties to the companies they are backing, especially if they are acting as corporate advisers.
Hunting for deals
Higher labour costs after the Budget and renewed inflation concerns have hit investor sentiment for the retail sector, which Jefferies analysts said now trades at a 15 per cent discount to its long-term average. However, RBC Capital Markets analysts said wage growth should support spending, while operating leverage and cost efficiencies could help ease the pressure.
RBC pointed to Currys (CURY), which is making strides in the UK and Nordics, where it retains a “strong” market position that should serve it well as rates come down. Despite a near-90 per cent surge over the past year, the company trades at 3.7 times enterprise value/Ebitda, which Panmure Liberum said puts it in “deep value” territory.
Peel Hunt favours discount retailer B&M European Value Retail (BME), which it said scans well for growth, income and value. The broker argued that its business model is “one of the best” in the sector, yet the forward earnings multiple of nine is one of the lowest. “That disconnect offers investors a great ‘in’,” analysts Clyde Lewis and Charles Hall said.
Beyond the high street, Peel Hunt and Panmure Liberum are seeing scope for further gains at British Airways parent International Consolidated Airlines Group (IAG), despite rising by more than 125 per cent over the past year. Even with ongoing upgrades, IAG trades at less than seven times 2025 earnings, which Peel Hunt argued fails to reflect the group’s “improved quality, cash generation and capital returns”.
Moving on to energy stocks and Shell (SHELL) remains a broker favourite. Barclays said the shares offer both value and momentum into 2025, with operational growth and cost savings leading to strong cash flow generation. The broker expects free cash flow to be around $23bn (£18.7bn) this year, leaving “plenty of room” to pay dividends and buybacks. Shell will hold a capital markets day in late March to present its strategy beyond the current “sprint” to greater profitability laid out by chief executive Wael Sawan in his first months in the job.
Recovery plays
The UK construction market has taken a hit over the past two years, with higher interest rates dragging down activity. However, analysts at RBC expect to see volume growth in 2025, driven by the Labour government’s push to build 300,000 new homes a year.
Within building materials, top picks are brickmakers Ibstock (IBST) and Forterra (FORT), which the broker said were at the start of a “multi-year volume recovery” as demand for bricks slowly rebounds from the lows last seen during the last global financial crisis, backed by the UK’s chronic housing shortage and oligopolistic brick market.
Forterra is also a favourite at Zeus Capital, which regards the group as an operationally geared play on the housing market recovery. Although a slower pace of rate cuts this year could dampen housing demand, he argued that the recommendation is not based on a “new paradigm” in UK housebuilding, but rather a return to pre-pandemic activity levels.
A housing market rebound could also be good news for Foxtons (FOXT), although the estate agent was highlighted by Zeus and Panmure Liberum for its market share gains, improved sales earnings and lettings revenue growth. Without accounting for potential M&A, Panmure Liberum expects earnings per share (EPS) to grow by an average 16.3 per cent over the next seven years.
Another sector that had to ride out a tough year was industrials, weighed down by weak global purchasing managers’ index (PMI) data. Jefferies said it may be too early to “go all in” on the cyclicals, but the broker is “cautiously optimistic” that there will be some improvement as the year unfolds. As such, among its key buys is thread manufacturer Coats (COA).
A new chief executive is expected to unveil a new strategy for the group in March, including how to improve the performance of the personal protection business. Jefferies expects this to come with higher Ebita margin targets and a renewed capital allocation policy now that the company’s pension liabilities are fully hedged.
Investment trust picks
Brokers’ investment trust recommendations for 2025 have come later than last year, presumably thanks to the drama currently engulfing the sector. However wide trust discounts persist and some have pointed out names they rate as we enter 2025.
Focusing first on UK equity funds, analysts praised those teams that seek out unloved stocks. Peel Hunt’s annual ‘playbook’ for income trusts highlighted Law Debenture (LWDB) as a UK income play thanks in part to its strong returns and dividend growth.
As we discussed last year the fund benefits from revenue generated by its independent professional services business, something that enables the managers to take a “contrarian, value-focused” approach. The manager can back recovery stories including companies like Rolls-Royce (RR.) that canned their dividends in more challenging times.
Analysts at Winterflood have opted for another play, however. They actually switch from Law Debenture (which sat in their 2024 recommendations) to Temple Bar (TMPL), whose managers Ian Lance and Nick Purves have a “well established value approach”. Winterflood’s team worries that Law Debenture’s independent professional services business could face a more challenging market backdrop, especially in its pension trustee division.
Winterflood’s team continues to like other contrarians, most notably Fidelity Special Values (FSV) manager Alex Wright, who seeks out unloved stocks both in the UK and overseas. However, Winterflood does try to add some other investment styles on the domestic front, and it’s worth noting here that they have dropped Nick Train vehicle Finsbury Growth & Income (FGT), which has struggled in recent years and has a dividend yield of just 2.1 per cent, making it seem out of place in the AIC’s UK Equity Income sector.
The Winterflood team has swapped FGT out for Mercantile (MRC), noting that the latter has a growth mindset but less stock-specific risk than Train’s highly concentrated fund. It also comes with a higher yield and a good record of dividend growth – although its focus on small and mid-cap shares means investors might be more interested in the fund as a growth play than for income.
Further afield
Winterflood has turned away from a few popular names in Asia and emerging markets. The team has dropped Baillie Gifford vehicle Pacific Horizon (PHI) in favour of Schroder Asian Total Return (ATR), noting that the latter’s unconstrained approach and quantitative research make it ‘best placed to navigate political frictions, which we expect to have a sizeable impact this year’. Such concerns explain why Winterflood also removes Fidelity China Special Situations (FCSS) from the list, noting that Chinese shares are likely to be “overwhelmingly driven by geopolitical developments and other macro factors” over the next year.
Sticking with Asia, it’s interesting that Winterflood drops the popular Nippon Active Value (NAVF) for AVI Japan Opportunity (AJOT), noting that the latter “has a similar activist approach to Japanese small-cap investing but has outperformed over the last year and benefits from an annual redemption opportunity”.
Looking for a broader play, Peel Hunt and Winterflood continue to like the flexible and total return-minded JPMorgan Global Growth & Income (JJGI), which has absorbed numerous other trusts in recent years.
Turning to alternative asset classes, which are still plagued by big discounts but less under threat from an activist such as Saba, Peel Hunt and Winterflood both point to BBGI Global Infrastructure (BBGI) as one interesting play, with Peel Hunt noting its cash flow and dividends are supported by the strength of contractual revenues on its assets.
Elsewhere, both teams like Cordiant Digital Infrastructure (CORD), which has a focus on two central European broadcast businesses but has diversified into other areas such as data centres too.
Analysts also continue to make the case for trusts that back private companies to recover: Numis has argued specifically that opportunities “abound” in private equity, pointing to options such as software play HgCapital (HGT) and the concentrated Oakley Capital (OCI). They, alongside analysts at Panmure Liberum, also continue to expect more of a recovery from Klarna holder Chrysalis Investments (CHRY).