Oliver Maslowski Portfolio Manager, European equities
One high conviction stock for 2016 is Bayer. The company underperformed the DAX and its peer group year-to-date as investors remain sceptical regarding the potential of its pharmaceutical product sales and its crop protection exposure, given the slump in commodity prices and its difficult chemicals division IPO (Covestro). Strong third-quarter results, solid earnings growth, a 10% valuation discount to EU pharma peers and modest market expectations are a good setting for potential outperformance in 2016.
Gianmarco Mondani Investment Director, non-directional equity team
The stock has underperformed the market on fear that low oil prices and growing capacity will mean greater competition and erode its margins. It trades relatively cheaply on 10 times forward earnings and has solid margins, strong balance sheet and plenty of opportunity (like Ryanair) to gain more market share and beat consensus expectations.
Mark Hawtin Investment Director, technology strategies
We think 2016 is a good time to look at Intel again. The company has suffered in the past with the ‘leaky bucket’ of declining PC sales, however, there are signs that this will slow in 2016 or may even flatten out. One of the core themes of its recent analyst day was that growth in the Data Centre Group (cloud) and internet of things/mobility business will compensate for the slowing PC business. With relatively cheap valuation levels (14x) and a dividend yield of almost 3%, it is easy to see how Intel, like Microsoft, can become part of the basket of investments to hold for the developing cloud story.
John Lambert Investment Director, global and UK equity strategies
Pearson sold off significantly during the final quarter of 2015, following company comments that the second half of the year would be weaker than expected. While this was disappointing, we believe there is still a strong case to be made that Pearson is a global leader in education technology, and that recent poor performance can and will be rectified. The role of technology in education will continue to rise, and so long as educational outcomes in many developed markets remain below expectations (notably the US), then demand for Pearson’s core offering should remain structurally intact. With further investment and some strategic repositioning, the company can begin to grow again and as a result regain a higher valuation multiple. Recent disposals have been very timely in this regard, with the company selling the FT Group and also its stake in the Economist and, on a proforma basis, thus eliminating most of its net debt. The stock looks particularly cheap in comparison with its own history, and expectations remain very low. To contrarian value investors, the stock looks very interesting at these levels.
Ernst Glanzmann Investment Manager and Head of the Japan equity strategies
SMC is a manufacturer of pneumatic equipment and actuators used for factory automation. The share price has underperformed in 2015 due to concerns over China and a slowdown in smartphone production/sales in 2015. However, 65% of SMC’s total sales are in developed countries, where the company has a steadily growing market share. In addition, the slowdown in China seems to be priced in to the share price, and the price should react on positive news, such as industry consolidation and more capacity reduction led by the government.