Shuffle your portfolio to survive a harsh winter

There was a real ‘back to school and back to business’ feel in the air last week – until we learnt of the sad death of the Queen. While parents took pictures of uniformed offspring outside their front doors, the press took pictures of the most famous front door in the country as Liz Truss replaced Boris Johnson at No10. 

Economists are now assessing how well the country will hold up as the temperature drops while many investment experts are positioning their portfolios for a change. 

The new Prime Minister’s plans to freeze energy prices have been widely welcomed, but they are expensive and, some fear, may not be enough. 

Even with the ‘big bazooka’ initiative to address spiralling energy prices, the economy still faces real challenges over the next several months. According to Jason Hollands, a director of wealth manager Evelyn Partners, times will be tough for many households. 

He says: ‘There is still the possibility of a recession, though one less severe as a result of the energy package announced on Thursday. Interest rates will still rise from here, though maybe not to the 4.5 per cent level that some have suggested and the stock market had begun to factor in.’ 

With uncertainty in the air and more Government announcements likely to come, investors are wondering how to position their portfolios for a bumpy, and cold, few months. 

The state of the nation’s finances 

The incumbent in Downing Street may have changed, but most of the issues impacting on the economy are the same. Energy costs remain high as does inflation, while the pound has slumped to a 37-year low against the surging dollar. 

Russ Mould, investment director of investment platform AJ Bell, says that we should be looking at the performance of sterling and gilts when assessing the economic outlook, rather than the short-term vagaries of the stock market. 

He says: ‘Financial markets express their faith – or lack of it – in a country and its economic and political prospects through how much they charge it to borrow and how they value its currency. In each case traders and investors are already indicating that they do not like what they see – a falling pound and rising gilt yields.’ 

He says the ‘odds are stacked against’ Truss when it comes to changing this, with the Government juggling ’40-year high inflation, the threat of a recession, an energy crisis, war in Ukraine, the weak pound, rising interest rates and the Government’s own state of penury.’

…and The state of our own investments 

With such a difficult outlook, investors might be wondering why they should stay in investments at all. Certainly the performance of the stock market over the last few months has not been encouraging. ‘Even eternal investment optimists might be struggling to keep their chin up at the moment,’ admits Dzmitry Lipski, head of funds research at wealth platform Interactive Investor. 

The FTSE100 Index is down nearly four per cent this year so far and those who entered the current volatile environment with a portfolio of growth stocks – those in technology and other high-octane industries – will have had their fingers badly burnt. 

Darius McDermott is managing director of investment funds specialist Chelsea Financial Services. He says there is ‘no easy answer’ in the current environment to the question of where investors should be investing their money. ‘So much is determined by the outcome of the Ukraine war,’ he adds.

Be defensive when picking stocks

Despite the difficulties, McDermott says ‘there are still ways of generating positive returns during this period of uncertainty’. 

Picking the right stocks could help to ensure your investment portfolio withstands a difficult winter – with most experts suggesting a defensive approach while Truss sets out her stall. Hollands says: ‘In an environment of high inflation and stalled economic growth, markets typically favour businesses with strong balance sheets that are less sensitive to the general economic environment,’ says Hollands. ‘These include consumer staples – businesses that provide day-to-day stuff people can’t live without; health care stocks; and those which have multi-year order books such as defence companies whose clients are governments.’ 

In particular, he likes consumer goods business Unilever, drugs group AstraZeneca and defence company BAE Systems. 

McDermott agrees. He says consumer goods companies ‘often tend to provide bear market protection’ because regardless of how the overall economy is faring, ‘families will continue to buy essential items such as food and toiletries’. 

He also likes Unilever for its ‘healthy cash flows, strong profit margin and steadily growing revenues’. Shares in Unilever are down 0.7 per cent this year, and are cheaper than many peers. 

Rob Burgeman, of wealth manager Brewin Dolphin, is hopeful that business on the high street will pick up after Truss’s energy package. He adds: ‘Any tax cuts in the offing may see people buy more clothes, especially to help them layer up for the colder months ahead and avoid turning on their heating.’ He favours shares in Marks & Spencer and Next. 

Burgeman is also hopeful that Truss will focus on infrastructure spending – big capital projects such as road and rail building – to help stimulate the economy. If so, builders and construction groups such as CRH and Balfour Beatty could be among the main beneficiaries. 

He also adds that those who believe a winter of discontent lies ahead could take comfort in buying the likes of insolvency practitioners Begbies Traynor and FRP Advisory. They will pick up the pieces if businesses fail. Coach operator National Express should benefit if rail strikes continue, forcing commuters to seek alternative travel arrangements. 

Hollands says Truss’s promise to shelve next year’s planned corporation tax hikes may benefit smaller domestically focused companies. Businesses in the FTSE250, which is more domestically focused than the FTSE100, could benefit the most. 

FTSE250 stocks such as M&S and Greggs rose after Truss’s appointment in the expectation that her energy package will prompt more customers to spend more.

Investment funds for difficult times 

Buying into diversified focused investment funds can be a safer way of getting investment exposure particularly when the future is unclear. 

Chelsea’s McDermott suggests Fidelity Global Dividend and Evenlode Global Income. The Fidelity fund is up 1.6 per cent over one year and up 18 per cent over three years while Evenlode Global Income is down 0.5 per cent over one year, up 18 per cent over three years. 

McDermott also likes JPM US Equity Income which gives investors exposure to healthcare giant Pfizer. He says: ‘Regardless of economic and market cycles, health care will be prioritised by society. 

‘Pfizer has impressive cashflow, revenue growth and should hold up well despite unfavourable market conditions.’ The fund is up 18 per cent over the past year, and 40 per cent over three years. 

Three investment trusts with exposure to FTSE250 stocks are Mercantile, JPMorgan Mid Cap and Schroder Mid Cap. 

Investors in these funds have had a torrid time of late, but new entrants could pick up a bargain because their shares are undervalued. Over the past year, they have recorded respective losses of 34, 42 and 33 per cent.

James Carthew, at fund information group QuotedData, suggests now might be the time to buy into renewable energy funds. 

Wind funds are already becoming more popular, with two new renewable energy funds entering the top ten list of most bought investment funds last month via platform Interactive Investor. They were the Renewables Infrastructure Group and Ecofin Global Utilities and Infrastructure, joining Greencoat UK Wind that has been on the list for a while. 

Shares in these companies have had a strong run, but even though the shares aren’t cheap, Greencoat could be a good addition to a portfolio in the long term. 

The last word…

However you choose to configure your investment portfolio for the winter ahead, it is worth remembering that although the future is hard to call at present, the key tenets of investing still stand. 

That is, stay diversified, think long term, and do not turn paper losses into real losses by selling unless you have a good reason to do so. 

Interactive Investor’s Lipski says: ‘History shows that stock markets do recover – so the current difficult environment is a reminder of the need for investor discipline and patience.’