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Top Shares to watch in 2020

Stock market predictions for 2020 and highly rated stocks this year

Will 2020 beat the record highs of 2019?


2019 was a difficult year for the financial markets, yet by 31st December some markets were close to or at all-time highs. Why was this and is it possible for 2020 to continue to deliver gains or are we in for a correction?


Last year started well with a rally for the FTSE100 of over 600 points in the first 3 months, this was a 9% rise and whilst no records were broken this was a good start to the year. Hopes were growing that the US were having constructive talks with China to resolve the trade tariffs and the UK was heading for Brexit on March 29th – little did we know!


Towards the middle of April ’19 markets started to sell off again, as the UK Government failed to reach a Brexit deal and this encouraged investors to sit on their hands until something was agreed. And so this “seesaw” action went on for much of the year with some markets rising to set all time highs only to fall back on negative geopolitical news.


So where are we now and what do the experts predict for the UK market for 2020. As ever there are a varying range of views with suggestions that some markets are overpriced and offer little growth whilst others are undervalued compared to their peers and should perform well this year – the FTSE100 being one of them.


Not surprisingly the UK market has under-performed and extra caution is required when considering where to invest your money and how the fluctuations in GBP will impact on the value of certain shares. Much of the revenue generated by FTSE100 firms is in foreign currency, in fact only 30% is from UK earnings. So if 70% of earnings is in other currencies, then the movement of GBP against those currencies is critical because at some point they will need to be converted in to sterling. The lower the pound the better the conversion and vice versa. This is why investors will have seen the FTSE100 index rally on days when the pound is week and fall when it has been strong.


See the chart below which compares the exchange rate of USD/GBP with the value of the FTSE100 index. The trend here tends to show the above scenario.


The UK still needs to negotiate a Brexit deal by 31/12/2020 and it is uncertain as to what this deal will look like and if it is going to be favourable to the UK economy as a whole and the share prices of the firms listed in the UK. Sectors to watch on a rallying pound will be house builders, banks, utilities, retail, commercial property and REITS conversely commodities, healthcare/pharma and staples.


So let’s look at what an expert in technical analysis suggest might happen

Technical analyst Chris Beauchamp from IG, states that the FTSE 100 may not have had the spectacular 2019 enjoyed by the S&P 500, but the index may be on the cusp of a breakout following its rally from 7100. The price is challenging trend-line resistance from the May all-time high at 7903.


A breakout above this targets 7600, and then leaves 7796 as final resistance before 7903 itself. This year has seen support develop around 7100 and 7000, forming higher lows as the price pushes higher from the 2018 low at 6540.

Other analysts suggest the following targets for the FTSE100 index for 2020



Elsewhere an analyst at Goldman Sachs said that 2020 could be a good year for UK stock market, but, (there’s always a but), this depends on how Brexit goes. “In 2019, U.K. assets have done well as risks have receded,” said Goldman strategists led by Peter Oppenheimer. “For 2020, we expect the out performance to continue as the U.K. delivers better growth.”


With a good majority, UK PM Boris Johnson holds a strong hand to negotiate free trade deals with Europe and other non-European economies eager to do business with the UK. There have been many reports of investors piling in to UK focused funds as investors have been holding back in taking risk until after the general election in mid-December. Investors will take on risk in anticipation that their investments will rise or provide them with a good income and certainly the UK has not been at the top of buyers lists since June 2016.


The tricky part is deciding which stocks are the best ones to buy?


So let’s look at the two main reasons why an investor might buy a particular stock.


Income – Stock picking to maximise the yield on your money. Investors will look for high dividend yielding shares. Being cautious to investigate the reasons why the yield is high to ensure there are no underlying issues with the company and or the sector.


Capital growth – Investors will look for companies or sectors that they believe have good growth prospects or in their view have been oversold or simply might be considered cheap. In 2019 a good example of this was the housebuilding sector. The share prices of these firms fluctuated with the varying possible outcomes of Brexit and not specifically on how the firms were performing or their profitability. Share prices fell following Theresa May’s various defeats in the House of Commons and when Boris Johnson managed to get a deal agreed share prices of house builders rallied. The biggest one day move for this sector in 2019 was on December 13th following the Tory election victory.


The key thing for any investor to consider is their appetite for risk. Some investors with a high appetite for risk might have bought shares in the housebuilders on 12th December because they thought they were cheap assuming there was a big Tory victory. However, the risk here is that the share prices might have dropped significantly had the result been different. An investor with a low risk strategy might have steered away from such risks and waited until they knew the result before investing. Both decisions carry risk as does any investment decision.


Stocks to watch for 2020


Income

Imperial Brands – Currently the yield on these shares is just over 10%. What does this mean? If you were to buy £10,000 worth of shares you would receive around £1,000 on dividends if you were to hold the shares on the four ex dividend dates in a 12 month period. An investor might ask why such an established company is paying such a high dividend. Companies like to maintain the amount of dividends that they pay to encourage investors to buy their shares, however if the share price falls significantly then the yield will increase. In this instance Imperial Brands share price has fallen in the last 3 years from over £35.00 to £20.00 on the 14/01/2020 and during this time the company has not reduced the dividend payments. This is where the investor will need to investigate why the share price has fallen so much to then be in a position to make an educated investment decision. Imperial Brands generates much of its income from tobacco products and derivatives thereof and as such the recent news that e-cigarettes might be more dangerous than simply smoking a standard cigarette has had a significant impact on the share prices of companies operating in this sector. Some States in the US have banned vaping completely and this will have an impact on the revenue of Imperial Brands its profits and the share price. Notwithstanding the negative news surrounding this sector a 10% dividend yield is a sizeable return.


Persimmon – Persimmon are in the UK housebuilding sector and have paid good dividends for a number of years. They currently yield around 8.5% on a share price of £27.35 on 13/01/2020, but only a few months ago they yielded just under 13% when the share price was lower because the UK was heading for a No-Deal Brexit. Nonetheless some of the negative sentiment in the sector has gone and many reports have suggested that UK property prices should experience some positive gains over the coming years as the UK may enjoy more political stability. Although we still have to negotiate Brexit.


Capital Growth

Future (FUTR) – Listed in the FTSE250 market Cap as at 14/01/2020 £1.33 BN

Future promote themselves as “a global platform for specialist media with scalable, diversified brands. We connect people to their passions through the high-quality content we create, the innovative technology we pioneer and the engaging experiences we deliver.”


Future has over 130 media brands in the UK, US and Australia, spanning a wide range of interests including technology, gaming, entertainment, music, television and photography. Some brands you may have heard of FourFourTwo, cyclingnews, Playstation Official Magazine to mention a few.


The company described its most recent financial year to the end of September 2019 as a 'transformative year' after revenue jumped 70% to £221.5 million while pre-tax profit leapt to £12.7 million from just £4.4 million the year before. The company restarted dividend payments in the 2018 financial year. The strategy is growth through the acquisition of new digital platforms and in October Future announced that it had bid £140 MN to acquire one of its rivals TI Media which again could be transformational.


The 3 most recent broker reports have an average price target of 1821p and all have a buy rating on the shares. This target offers a 30% upside from today’s price of 1404p.


Microfocus MCRO – Listed in the FTSE 100 market Cap as at 14/01/2020 £3.47 BN

Micro Focus is a UK based software and IT company providing consultancy and management/analytical software to a worldwide business audience. In 2017 they purchased Hewlett Packard Enterprises, which included parts of the Autonomy business bought by HP in August 2011. Since the acquisition Micro Focus have experienced operational problems and have issued a number of profit warnings sending the share price down to a low of 784p in March 2018 and in July 2019 the price hit 2172p. However in August 2019 Micro Focus announced that they were reducing their profit guidance for the year and in November this reduced guidance was re-iterated.


In October last year Bloomberg reported that US firm Open Text were looking at a possible takeover of MCRO only for the MCRO board to confirm 3 days later that Open text were not considering a bid. Earlier in the year Micro Focus had announced that they were reducing their profit guidance for the year and in November this reduced guidance was re-iterated.


On Monday 13th January 2020 a report in the Times newspaper reported that US investment firm Dodge and Cox had increased their stake in MCRO to 17%. The report went on to say the company prepares to update shareholders om its plans to revive its fortunes on 4th February. Shares currently trade just over 1100p on 16th January 2020. 1390p is the average price target of 6 brokers with 3 buys, neutral, equal weight and a hold among the recommendation.


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