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FOOL'S EYE VIEW
By
Carburton Street, London -- Following last week's tragic events, and the stock market turmoil that followed, you may have been wondering whether your share portfolio could do with an overhaul. According to the doom-mongers, of which there are plenty these days, war and recession is nearly upon us. So how should stock pickers prepare for the dark days that could lie ahead? If war and recession are on the cards, you could broadly catergorise pre-emptive share investors into three groups: * Safe haven: investors who seek companies whose profits should remain steady throughout any political or economic instability; * Recovery/Crisis: investors who seek companies that should experience sharp profit declines in the near future, but whose share prices will recover as and when the turmoil evaporates, and; * Vulture: investors who seek companies that could capitalise on the forthcoming gloom. So, here are three example portfolios that could suit each of the above investors. Please note: none of the shares mentioned should be treated as a formal recommendation. Safe haven The following list gives the type of company that should be least affected by any economic turbulence.Company Market Value Share Price
(£m) (p)
Boots (LSE: BOOT) 5,901 656
BP (LSE: BP.) 127,064 566
GlaxoSmithKline (LSE: GSK) 110,016 1,760
Imperial Tobacco (LSE: IMT) 4,638 891
Scottish & Newcastle (LSE: SCTN) 3,335 515
Scottish & Southern Energy (LSE: SSE) 5,417 631
Tesco (LSE: TSCO) 17,326 248
Unilever (LSE: ULVR) 36,010 565
The companies should be familiar to most people. Unloved during the dotcom boom, those involved in mundane industries such as healthcare, cigarettes, electricity or food are now seen by many as attractive homes for long-term savings.
Recovery/Crisis
The following companies have all seen sharp share price falls of late.
Company Market Value Share Price
(£m) (p)
AMVESCAP (LSE: AVZ) 5,519 705
BAA (LSE: BAA) 5,273 497
British Airways (LSE: BAY) 1,884 174
First Choice Holidays (LSE: FCD) 461 90
Hilton Group (LSE: HG.) 2,610 165
P&O Princess Cruises (LSE: POC) 1,456 210
Royal & Sun Alliance (LSE: RSA) 5,013 349
WPP (LSE: WPP) 6,244 520
Airline and travel-related companies with substantial exposure to the US have fallen for obvious reasons. Insurers such as Royal & Sun Alliance (LSE: RSA) have understandably suffered too. Meanwhile, shares of fund managers such as AMVESCAP (LSE: AVS) and media firms such as WPP (LSE: WPP) have suffered as stock markets plunged and companies curtail their advertising.
It will be these sorts of companies that will rebound the strongest as and when the dark clouds clear. However, the timing and the extent of any recovery are unknowable. A lot can (and will) happen between now and any upturn.
Vulture
Finally, here's a list of companies that could benefit from war and recession.
Company Market Value Share Price
(£m) (p)
BAE Systems (LSE: BA.) 10,747 352
Cobham (LSE: COB) 954 950
Enterprise Oil (LSE: ETP) 2,643 541
Guardian iT (LSE: GRD) 228 325
Matalan (LSE: MTN) 1,825 434
Provident Financial (LSE: PFG) 1,579 634
Rentokil Initial (LSE: RTO) 4,629 238
Smiths Group (LSE: SMIN) 3,520 635
Companies supplying military and defence systems -- notably BAE Systems (LSE: BA.), Cobham (LSE: COB) and Smiths Group (LSE: SMIN) -- could all be beneficiaries should the recent terrorist attacks lead to war. And with military conflicts tending to boost the price of oil, Enterprise Oil (LSE: ETP), probably the UK's purest play on the oil price, could be another winner. The recent tragedies could also bolster the prospects of Guardian iT (LSE: GRD), the specialists in IT disaster recovery operations, too.
In terms of any forthcoming recession, the likes of discount retail chain Matalan (LSE: MTN), employer of the low paid Rentokil Initial (LSE: RTO) and doorstep moneylender Provident Financial (LSE: PFG) may all see a boost in fortunes as the people spend less, resort to low paid work or lose favour with their bank manager.
All change?
But should you suddenly change the constituents of your share portfolio in light of recent events? Should you also consider non-equity alternatives, such as cash or gilts? Just how should you prepare your portfolio for possible troubled times ahead?
Well, there are no specific tips here. And beware of anybody who claims to have any.
Instead, ordinary investors ought to contemplate the usual stock picking questions and perform the usual research. Asking "why is this company a good long-term investment at its current share price?" is a good start. Indeed, you'd ask the same questions now as you asked about prospective investments last week, last month and last year.
Nothing essentially has changed in terms of successful long-term stock picking. Beating the market is as difficult now as it has always been -- and always will be. Where investor danger lies at present is from rapidly changing an investment philosophy. For instance, suddenly becoming interested in defence-related companies, or jumping ship to "safe" tobacco firms, are sure signs of short-term investing. And such kneejerk stock market myopia typically leads to shareholder heartache.
History
While financial commentators (like myself) can highlight example share portfolios to take advantage of current market conditions, the fact is that they (and me) have no real idea how they'll perform in the years ahead. Remember, the future is inherently uncertain. And so, whether the financial outlook is bright or cloudy, the best preparation any long-term equity investor can do is consider an index tracker.
Look at history. Whether it's the Great Depression, the Second World War, the Cuban missile crisis, three-day weeks, Black Monday or the Asian financial crisis, stock markets have always come good in the end. What's more, even with all the adversity and catastrophes of the past, the stock market has outperformed cash and gilts in 93% of all ten-year periods dating back to 1918. Indeed, over the next five years, my money would be on an index tracker (at the FTSE 100's present level of 4,804) beating any portfolio that's hastily changing to recent events.