How to thrive when markets are in turmoil
From gold to a top insurer, the tips you need on investing when the FTSE cuts up rough
PERHAPS it had to happen sooner or later. But last week’s rollercoaster ride on the stock market was nerve-jangling, especially so, given predictions that further volatility lies ahead.
Ironically, stronger economic growth in most parts of the world is largely to blame, prompting suggestions that interest rates will rise faster than expected. That is broadly considered bad news for equities: higher rates make it more expensive for companies to borrow and can encourage investors to buy bonds instead of shares.
The knee-jerk reaction when markets misbehave, is to sell everything and run for cover. That is rarely the best policy, however. Instead, investors are advised to keep their heads and make sure they own a broad spread of shares in different industries and with different attributes.
1 AVIVA
INSURANCE group Aviva highlights the way in which strong leadership and smart management can transform a business. When Mark Wilson joined in early 2013, the insurance group was in a sorry state, having expanded in too many directions and amassed too much debt. Wilson cut the dividend and sold off unprofitable businesses to create a simpler and stronger company. Today, Aviva is reaping the rewards and the shares, at 486.5p, offer solid, long-term growth and attractive dividends.
Last November, Wilson said that dividends would be higher than analysts anticipated because the company was growing faster than forecast and would have £3 billion of surplus cash in 2018 and 2019.
Brokers interpreted this to mean double-digit dividend growth for the foreseeable future, with special dividends or share buybacks possible too. The group’s results will be out next month and a dividend of 26p is expected, rising to 30p for 2018 and 34p for the following year.
This means the stock is yielding well over 5 per cent. Aviva’s payouts are not only rising at one of the fastest rates among FTSE 100 companies but the increases are backed up by strong sales and profits growth.
The company offers general and life insurance and is doing well in both. Last summer it signed a 10year deal with HSBC so the bank will offer Aviva insurance products to all its customers, one of the largest transactions of this kind in years.
Aviva policies are also on offer at Barclays, Santander and the Co-op, as well as online and via specialist brokers. On the life assurance front, Aviva bought rival Friends Life in 2015, a £5.6 billion deal, which consolidated the group’s position in the savings and pensions sector. The company has made several smaller acquisitions since, including the purchase of other firms’ pension liabilities. Specialists such as Aviva tend to manage these pension pots more efficiently.
Further deals are likely, not just in the UK but overseas as well. Midas verdict: Aviva shares have fallen from 534p in January to 486.5p today, at which point they are a long-term buy. The dividend alone makes this stock appealing while the long- term growth prospects should provide further momentum.
2 ECO ATLANTIC
ECO Atlantic Oil & Gas is an exploration company looking for oil off the coast of Guyana and Namibia. This may seem an unusual stock for uncertain times but Eco has powerful friends and the shares, currently 31.1p, should go far.
The business was founded by a group of entrepreneurial friends, with more than 200 years’ combined experience in the energy industry. Their intention was clear from the start. First, they identify underexplored but politically stable parts of the world where oil might be found. Second, they negotiate directly with governments to obtain the right to explore. Third, they carry out some initial studies to show that oil is probably where they think it is and then they partner with major energy groups who can provide financial and operational support.
The approach is working. Guyana has become the most exciting place in the world for new oil discoveries, after US giant ExxonMobil identified more than three billion barrels of oil 120 miles off the coast.
Eco is working with London-listed Tullow Oil. Drilling will start in the next 18 months and early indications suggest that Eco and its partners could be sitting on more than a billion barrels of oil. If so, Eco’s share would be valued at around $750 million (£540 million).
The Namibian assets could also prove highly rewarding. Past exploration off Namibia has been patchy but the area has attracted recent interest from some powerful players, including Total and ExxonMobil, whose assets are i n close proximity to Eco’s. The company intends to start drilling here this year and early indications suggest its project could deliver over 800 million barrels of oil. Eco’s share here would be valued at around $500 million. In both Guyana and Namibia, the calibre of its neighbours and partners i s highly encouraging. Financially, the company has reduced its obligations through partnerships and recently benefited from an £ 8.5 million investment from Africa Oil Corp, a major Canadian-listed business.
Africa Oil Corp now owns 19 per cent of Eco Atlantic and the duo have formed a strategic alliance to seek new exploration opportunities. Midas verdict: Eco Atlantic is valued at around £50 million on the stock market. If either or both of its ventures come good, it should be worth a lot more. Even in the current stock market environment, the company is worth a punt.
3 GOLD
GOLD is often the go-to investment when markets turn choppy and the price has risen almost 6 per cent this year to $1314 (£940) an ounce.
It performs well during periods of inflation because it is seen as a long-term store of wealth. It can come under pressure when interest rates rise. But there is much to be said for investing in a small pot of gold and hanging on to it, especially right now. The price tends to rise when shares fall so it is a way of hedging against volatile markets.