Whether we are in for a period of devastating deflation, or a return to rampant inflation, these five high quality companies are a compelling each way bet.
The next bull market is almost upon us. This time, unlike the run the market has had in the past three months, high-yielding quality stocks will see their share prices recover.
Now should be a great time to put together a portfolio of such stocks. These are companies that should be able to weather most economic storms. But before I name four such candidates, let me set the scene…
Global interest rates remain at rock bottom levels. Here in the UK the base interest rate is just 0.5%. The best you can do in a high-interest savings account is a somewhat measly 2.5%, and even that is generally only an introductory offer.
Interest Rates Set To Remain At Their Measly Lows
And interest rates look set to stay at these low levels for some time. At their last meeting, the Bank of England's Monetary Policy Committee voted unanimously to keep interest rates at 0.5%, and also to maintain its £125 billion quantitative easing programme.
On the vexed question of inflation, the Bank of England said earlier this month "…there was no reason to conclude that the medium-term outlook for the economy, and thus inflation, had changed materially…"
Plenty of economists have predicted inflation will soar in the months and years ahead. They may be right. One of the most successful and respected hedge fund managers is billionaire Julian Robertson of Tiger Management fame. According to a recent interview on market folly, he thinks inflation rates could hit 7% easily and could go as high as 18%.
Never before in my investing career have I witnessed such a diversity of views on where the economies of the world may be headed.
On the one hand you've got respected economists and money managers like Robertson predicting rampant inflation.
On the other hand, you've got people like Nobel Prize-winning economist Paul Krugman predicting that the world economy would stagnate just as badly, and for just as long, as Japan's did in the 1990s. No sign of inflation for him. And then there's US Federal Reserve Chairman Ben Bernanke, who is confident the Fed will be able to contain inflation as the economy eventually starts to recover.
The Easier Way To Tackle These Unprecedented Times
So what are ordinary stock market investors to do? Should we short US treasuries and UK gilts, effectively betting on rising inflation? Or should we get out of the market altogether, fearing another lost decade of stagnant to falling share prices?
There is an easier way. There is a better way.
Right now, the stock market is offering you a compelling each way bet. Like all bets, there are no guarantees. But like the few successful punters, and all successful stock market investors, you can substantially increase your chances of winning by only betting when the odds are in your favour.
I believe whatever happens with the global economy, be that inflation or deflation, buying shares today in large, stable, high-yielding companies puts the odds firmly in your favour.
As for fears of a Japanese style lost two decades, all I can say is that if you are that fearful, you shouldn't be investing in the stock market. Instead, you should vow today to put your money in a savings account and leave it there for at least the next 10 years.
Great Each Way Bets You Can Make Now
So what are the each way bets investors should be making today? I believe the following companies offer…
- Excellent dividend yields today, especially when compared to the alternatives.
- Low valuations, offering decent downside protection should deflation rule the waves.
- The ability, largely via their size and strong competitive positions, to raise prices should inflation rear its ugly head.
| Company | Share Price | Forward P/E | Forward Yield |
|---|
| Royal Dutch Shell (LSE: RDSB) | 1,591p | 8 | 7% |
| GlaxoSmithKline (LSE: GSK) | 1,117p | 9 | 5.8% |
| Unilever (LSE: ULVR) | 1,491p | 12 | 4.7% |
| British American Tobacco (LSE: BATS) | 1,710p | 11 | 6% |
| Tesco (LSE: TSCO) | 360p | 11 | 3.9% |
Absent a sharp increase in inflation, the share prices of these big, stable companies are unlikely to suddenly take off and head for the hills. But likewise, they are unlikely to suddenly tank, unless the whole market goes into a panic induced reverse. (If that happened, it would be a great time to buy more shares in these strong companies at even cheaper prices). In the meantime, you can just sit back and enjoy the rising dividends.
Some Share Price Excitement
On the other hand, if you are looking for some potential share price excitement, there are some smaller companies who possess similar characteristics to these giants, yet are largely overlooked by the investing community. Unlike the big boys, it's these types of companies whose share prices could suddenly take off.
Maynard Paton's Champion Shares premium stock picking service boasts several such companies. If you'd like to take a free 30-day peek at all his current recommendations, click here for more information.
More on the economy and the markets:
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> Of the companies mentioned in this article, Bruce Jackson has an interest in GlaxoSmithKline.
