With May just around the corner, I have been thinking about what sort of thematic investment ideas might do well in the months ahead. Currently there are a few areas where I think share prices look beaten down. If that could offer me an attractive entry point for a company I like as a long-term prospect, it could be a good time for me to buy those shares. That said, in some cases, it could be that a worsening outlook changes the investment case for a share I already own.
1. Consumer goods
Inflation has been in the headlines for months – and it is more than just a news story. From bread to petrol, consumers are noticing the increasing cost of many everyday products. That is true not only in the UK, but across much of the globe.
Inflation is a risk for manufacturers, because their costs go up. That can mean ingredients, packaging, transportation, and more. Fears about the risk to profit margins posed by inflation have dogged manufacturing shares for months. But some companies are able to pass such cost increases on to their customers in the form of higher selling prices. If a company has attractive brands without a direct substitute, loyal customers may be willing to swallow price rises.
Consumer goods makers such as Unilever and Reckitt have seen their share prices hurt by inflation concerns. The Unilever share price is 12% lower than a year ago. Reckitt has not done as badly, but is still cheaper now than it was this time in 2021. There is growing evidence that consumer goods companies are passing price rises on to their customers, which could help sustain their profit margins. Unilever announced this week that while its first-quarter volumes fell 1% compared to the same period last year, an 8.3% pricing increase meant that revenues grew 7.3% in total.
I think some consumer goods companies that are successfully navigating growing inflation could make good additions to my portfolio.
2. Energy security
Energy has been a hot topic for years and has become even more so. There is an environmental pull factor and a geopolitical push factor accelerating attempts to reduce western reliance on fossil fuels.
I see energy as among the investment ideas I should investigate soon. But it is a broad one. New forms of energy from lithium to hydrogen throw up a host of shares that are exposed to the theme, such as ITM Power, Rio Tinto and AFC Energy.
Such companies are involved in a variety of different parts of the energy value chain. Some are highly developed, with an established business model that can generate profits. Others are companies still in their early stages with unproven commercial prospects. Some such companies could eat vast sums in development funds without necessarily turning a profit down the road.
So while I think companies connected to energy security make for an interesting investment theme, I am focusing my search on companies I think have a sustainable competitive advantage and profitable business model.
3. Defence
The geopolitical situation in Europe has deteriorated rapidly in recent months. That has wide-ranging implications both in Europe and further afield. One of them is an expected increase in defence spending, as countries replenish their armaments or increase their arsenals.
A number of UK shares are directly exposed to this market, such as Babcock and BAE Systems. Others have broader businesses but generate significant revenues from defence sales, such as Meggitt and Avon Protection.
I have invested in defence shares before, including Babcock. But in general I have historically not felt comfortable profiting from the sale of weaponry. Each investor is different and many are happy to invest in defence companies. That said, defence is among the investment ideas I will be revisiting in coming months.
4. Banks
The past few years have been a rollercoaster for shareholders in banks. Concerns about possible loan defaults during the pandemic turned out to be overdone in many cases. The banking sector has come back strongly.
But can this continue? Consumers are tightening their belts and the economic picture is worsening. Over time, that risks impacting employment and the property market, which could be bad news for profits at banks.
I continue to own shares such as Lloyds. But I am keeping a close eye on the UK economy and banking sector. If I think the outlook for banks is changing markedly and big profits could turn into losses, I would consider whether to keep holding my Lloyds shares in years to come.
5. Travel
May should see millions of people dusting off their suitcases and going on holiday. From airlines to hotels, it has been a tough time for travel and leisure companies. But I think this year’s holiday season could cause analysts to consider whether shares in the sector have been overlooked for too long.
As an investment theme, this could lead me to consider an airline like easyjet or Wizz for a possible fit with my portfolio. But I might also examine a big hotel operator such as IHG or Premier Inn owner Whitbread. I might not need to look far afield, though. After all, domestic travel specialists such as National Express and Go-Ahead might also see a boost to revenues from people holidaying close to home.
How I use investment ideas
Having identified these five broad thematic investment ideas, I will dig into them more in coming weeks. Even if an investment theme is promising, not all companies in that area will necessarily do well. There are usually winners and losers.
So, I will try to find companies that I think stand to do particularly well and are trading at an attractive valuation. At the same time, in a theme like banking, I will watch out in case a worsening business environment changes the investment case and makes me decide to sell a share I own.
Either way, I am hoping that these five broad investment ideas could help shape my thinking in May and beyond, hopefully helping me find the best shares to buy.
