The three rules of finding quality stocks in the UK amid market turmoil.

War, the cost-of-living crisis, climate change, political policy U-turns, you name it... There has been a lot of bad news over the past few months, and one only has to look at the reaction of UK markets to see how it’s all played out.

It’s easy to see why there’s a distinct waft of doom and gloom in the air and investors would be forgiven for thinking there’s nowhere safe from the ravages of a potential perfect storm. However, it’s in times like these that stock pickers really earn their crust. Because it’s not ALL doom and gloom out there and in the UK, in particular, there are positive company news stories and investment themes that can be played.

In our view, here’s the top 3:

  1. Pricing Power

With the double whammy of double-digit inflation and rising interest rates, investors need to own businesses that have pricing power. As input costs rise, businesses must decide whether to stomach lower margins or raise the price of their products, and only the best can do the latter. One such business that has been doing this successfully for over 100 years is Diageo. From whatever product you look at inside Diageo’s copious portfolio you will find exceptional brands all with positive attributes for the world we’re in today. For example, the brand loyalty behind Guinness, means that our local pub, opposite the brand spanking new entrance to the Elizabeth Line, can charge £8.50 a pint, which customers will and do pay for (see our chart, right, for the beverage’s pricing power since 1899). Margins can equally be maintained in their gin, tequila and vodka divisions where they are distilled and sold in the US and then factoring in recent USD superiority then Scotch Whisky has never been so cheap for Diageo to sell into the States.

  1. Quality management

In the panic of the ‘covid-crash’, in May 2020, Beazley came to market and raised $300m to strengthen the insurer’s balance sheet and invest in the business, with a focus on cybercrime, an area of risk that most insurers were busy trying to move away from at the time. Looking back, the 315p price looks extremely shrewd, at a time where panic had set in, and uncertainty was almost at its highest. Today, Beazley shares are north of 650p, and the business is capitalising well as cybercrime premiums go through the roof. One of the early steps of investing in quality businesses is researching their management teams and Beazley are certainly up there with the best in the Lloyd’s market. 

  1. Best of British

You don’t have to be investing in businesses that are dollar earners to see the green shoots of the UK market. There are many domestic names which are defying the negativity. Greggs, Trainline, Howden Joinery Group and Young’s have all released positive statements over the recent earnings season. Simon Dodd the CEO of Young’s stated that despite the economic uncertainty, their central London collection of pubs has performed remarkably resiliently and bookings for the key Christmas season are their strongest ever. After the year many people have had, I think we could all use a Christmas pie and a pint with a few friends! With more and more workers being encouraged back to offices, tourists returning and the impending FIFA World Cup in Qatar, the near-future for the UK’s on-trade and pub groups, in particular, doesn’t appear to be as stark as it seems.

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

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