Union Pacific, the iconic US railroad operator, transports cars, construction materials and the “frac sand” and pipeline required for shale gas extraction, so a punt on the company is arguably a punt on American growth. Rio Tinto provides the iron ore required by Chinese industry and the diamonds worn by Beijing’s elite. They’re two of the six core stocks analysts recommended when we asked for tips for the individual equities that give the best exposure to key global markets.
Here, for risk-aware stockpickers, are their thoughts in full.
UK: Aga Rangemaster
The word Aga might scream English country kitchen, but the company’s electric product range is increasing the scope of its markets. Its new Aga City60 has the practical dimensions of standard kitchen cabinets and the company is after young buyers.
Aga’s performance is closely linked to the housing market. Garry White, of Charles Stanley, says: “The company suffered badly during the financial crisis but new life in the housing market is helping it to return to growth. Revenues in the first half were up 3.3 per cent to £123.5 million. Two-thirds of those revenues were in the UK, where sales grew 9.7 per cent. Although markets have picked up, they remain volatile, but management is confident that it will have higher revenue growth in the second half of the year.”
Advertisement
Europe: RPC
RPC supplies plastic packaging for everything from cosmetics to food and paint. Customers include Nescafé and Nivea, the latter known for its skincare products favoured by celebrities including Diane Kruger. Around 65 per cent of the Northamptonshire-based company’s sales come from France and Germany.
Helal Miah, of The Share Centre, says: “This is a medium-risk investment for those looking for a mixture of income and growth. It has a strong dividend policy with the dividend forecast to grow by 20 per cent over the next two years. For growth, recent acquisitions in Europe, the UK and China are all performing well.”
US: Union Pacific
Union Pacific was incorporated in 1862 during the American Civil War to build railways considered necessary for the preservation of the Union. Today it’s the largest railroad network operator in North America, with its yellow locomotives hauling diverse heavy loads.
Advertisement
Nicolas Ziegelasch, of Killik & Co, says: “Union Pacific serves many of the fastest-growing population centres in the US and operates from all of the major West Coast and Gulf Coast ports, as well as connecting with Canada’s rail systems and six of Mexico’s major gateways. We believe the stock offers an attractive investment case as it’s exposed to several growth themes, such as the shale gas industry, housing construction and a recovery in the US auto market. There’s potential to enhance earnings through operating improvements. This should drive earnings growth of around 15 per cent a year for the next three years. While the yield is fairly low at 1.9 per cent, it’s expected to grow in line with earnings.” The company is listed on the NYSE.
Latin America: BG Group
Shareholders in the British energy giant have had a difficult ride. There have been profit warnings, exposure to crisis-hit Egypt and the departure of Chris Finlayson as chief executive in April. Nevertheless, Mr White says it has fantastic assets, none more significant than its interest in the deep-water oil fields off the coast of Brazil. He says: “The Brazilian economy is in recession and Argentina is potentially in default of its government debt, so it’s a difficult time for investors in Latin America. However, BG Group’s assets in Brazil could unlock significant value for the group over time.”
In a period of uncertainty in the Middle East and Russia, Brazil is among the world’s fastest-growing oil producers and aims to be in the top five by 2020.
India: Vedanta Resources
Advertisement
Vedanta Resources, which was founded in Bombay in 1976 and has its headquarters in London, has copper mines in Tamil Nadu and power plants in Punjab and Orissa. It is a key supplier of energy and commodity resources to the Indian market, and Mr Miah reckons that the FTSE 250 player is positioned to benefit from increasing demand for natural resources across emerging markets generally.
He says: “The company has a high level of debt but should be able to manage this as it has sizeable liquid assets and strong cashflow. The share price has fallen a long way from its peak a few years ago. Although the forward price-earnings ratio of 16 is slightly above the peer group, given impressive production growth of the various commodities and oil discoveries by a subsidiary, we continue to recommend the stock for high-risk investors.”
China: Rio Tinto
More than a third (35 per cent) of the British-Australian metals and mining giant’s sales are to China and it’s well-placed to benefit from growth there. Recent statements indicate a continued focus on its core business of extracting iron ore, which represents 50 per cent of revenues. Prices have fallen on slowing steel demand, but bullish analysts say that the biggest firms’ lower output costs can offset this. Mr Miah, who likes the stock as a bet on China, says: “The miner went from a loss in 2012 to a net profit of $3.7 billion in 2013, helped by cost-cutting measures and significantly lower asset writedowns and reduced capital spending.”
The company is working to cash in on China’s appetite for diamonds, marketing stones to its super-rich.