Defend your investments from the eurocrisis

Investors needed nerves of steel over the past week. Uncertainty over who would take over at No 10 and a euro crisis have given the British and global stock markets the jitters.

The FTSE 100 lost more than 10pc of its value, down to 5,123 last Friday, only to pile the points back on again on Monday morning, even though many expected shares to fall in value.

Markets continued to hold steady, but fund managers are warning investors not to be complacent in light of the coalition Government – uncertainty prevails in Europe and a sovereignty crisis looms, and that’s where danger lies.

Experts tip pharmacutical giant GlaxoSmithKline

Experts tip pharmacutical giant GlaxoSmithKline

The European Central Bank is steadying itself for further contagion effects of the Greek crash, Italy’s banks are looking unstable and Germany is suffering a crisis of confidence as a recent regional vote undermined Angela Merkel’s government.

“Eurozone uncertainty is having a much greater impact on the markets than British politics,” said Tom Ewing, manager of Fidelity’s UK Growth fund.

To avoid the ramifications of the Eurozone difficulties you do not have to flee the country for opportunities overseas – simply pick domestic stocks or British funds with global exposure.

“The UK market is a global market,” Mr Ewing said. “Two thirds of the FTSE 100’s earnings come from outside of the UK and the 20 biggest companies, the megacaps, have the minority of their business here.

“Very few of these larger-cap companies are UK focused, Tesco and Centrica remain Britain-centric but the FTSE is not UK plc”

Public perception may be influenced by the businesses that we are aware of in our everyday lives, such as Punch Taverns and M & S, but many British businesses generate the lion’s share of their earnings from outside the country.

What’s more, the prospect for dividend growth on British companies is looking brighter. According to Capita Registrars, more companies are paying out. Some 186 companies paid a dividend between January and March, up from 161 a year ago. Furthermore, the number of companies increasing payouts outnumbered those who cut. While 56 companies cut or cancelled their dividends, 30 held them unchanged and 102 increased or reinstated their payments.

Cash is doing nothing and gilts are paying 1pc or 2pc, but traditionally defensive stocks, such as Vodafone, Imperial Tobacco and BP are paying at least 5pc.

As you can see from our graphic, only 13pc of Vodafone’s 2009 revenue came from Britain. British American Tobacco gained 23pc of its earnings from the Asia-Pacific region, nearly half of AstraZeneca’s earnings are from North America and 100pc of Antofagasta’s revenue is from three mines in Chile.

The FTSE megacaps seem to offer the best of both worlds. Mr Ewing said: “I am bearish on the UK, but UK stocks offer better corporate governance, better accounting and I can more easily engage with the management. At the same time I can easily tilt my UK stock picks to get exposure to China, India and the rest of Asia.”

The British market has shown significant recovery from the low of 3,460 in March last year. Despite setbacks recently and in February this year, we are now nearly 2,000 points higher a year on.

Nigel Thomas, the UK Select Opportunities manager at AXA Framlington, believes this has been an industrial recovery, rather than a consumer one.

“The recovery in the market is due to urbanisation, the introduction of infrastructure and developments in the transport and energy sectors. The VAT increase was helped too, but I don’t think consumers are spending over here.”

In emerging markets, however, both phenomenons are occurring. As the middle classes expand, consumers are buying more – white goods, electricals and branded food and drinks. GlaxoSmithKline, for example, has moved its focus from the Western world to the developing one, selling toothbrushes, vaccines and Lucozade to India, China and Brazil.

Mr Thomas cites Andrew Whittington, at Glaxo, as prominent in this move and also notes competitor Unilever is doing the same.

There are some areas to avoid when picking megacap stocks. Commodities, in particular, draw criticism from Mr Ewing. “I would stay out of commodities, they are very volatile,” he said.

Utilities come under scrutiny from Mr Thomas – he fears that Bank Rate might soon start to tick up and is concerned about the consequences.

“If interest rates go up, utilities, which are linked to gilts, will be hit,” he said. “The sector is heavily regulated and, apart from National Grid and maybe some water companies, I would give them a wide berth for a while.”

Of course, individual stock picking is always tricky unless you are a hardened day trader. Rather than building up a portfolio of megacaps yourself, why not leave it to the experts? There are plenty of funds that specialise in this sector – both for British and US companies that draw earnings from less-developed economies, and they spread the risk within their holdings, so you don’t have to.

Brian Dennehy, of independent advisers DWC, said: “The UK economy and most developed economies have some years of pain ahead as sovereign debt and persistent deficits are tackled. The obvious call to avoid this is to focus on funds invested into UK companies with the bulk of earnings overseas, Newton Higher Income and Psigma Income both have this kind of focus.”

Mick Gilligan, of Killik & Co, tips Invesco Perpetual Income, which holds Tesco, Imperial Tobacco, and AstraZeneca, among others. He also highlights Mr Thomas’s Axa Framlington UK Select Opportunities fund and Artemis Income, which has stakes in HSBC, Vodafone and GlaxoSmithKline. BlackRock UK Dynamic is also on his list, with holdings in Compass Group, British American Tobacco, and Rio Tinto.


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