By Chris Dorrell
Last year was one of volatility for London’s markets in which its flagship FTSE 100 eked out a meagre gain of around two per cent.
However, certain diamonds in the rough shrugged off the jitters and roared ahead of the pack. Rolls Royce stood out as the biggest gainer with a rise of over 200 per cent, M&S rose over 114 per cent and private equity outfit 3i followed with a rise of 80 per cent.
But which firms may be surging ahead of the market this year? City A.M. has spoken to some of the Square Mile’s top analysts to get their pick of the field for 2024.
Stock pick: BAE Systems and Babcock
JP Morgan
BAE Systems and Babcock: Analysts at JP Morgan reckon defence stocks may be a good bet in 2024 as conflict continues to grip Ukraine and Gaza.
“We believe that geopolitical tensions are going to remain very elevated in 2024; and ultimately politicians in Europe and the US will ratify higher domestic defence spending and also ongoing support for Ukraine,” they argued.
The investment bank is ‘Overweight’ on both BAE Systems and Babcock – two of the FTSE 100’s largest defence firms.
BAE Systems has “ten years of visible growth,” the analysts said, pointing to a decade-long contract signed in December to provide explosives for US ammunition manufacturing.
Babcock meanwhile received an upgrade from S&P on its credit rating last month ahead of a capital markets day in early February. The capital markets day could provide a “positive catalyst” they noted.
Stock pick: Persimmon and Admiral
Michael Field, European market strategist, Morningstar
Morningstar’s analysts are betting on firms they reckon have been undervalued and weighed down by economic headwinds that may subside through the year.
Persimmon: British homebuilders have been hammered over the last couple of years on the back of rising interest rates, which have slashed demand markedly for mortgages and homes. However, the good news, says Morningstar’s Field, is that with interest rates likely to fall in 2024, demand should slowly start to recover.
Field says Persimmon’s share price bottomed in late October 2023, and they see “massive upside” on their fair value estimate from here.
Admiral: Motor insurance firms like Admiral have struggled with the high levels of inflation over the last couple of years, with insurance premiums usually lagging cost inflation.
However, Field says premiums are now rising, which should mean healthier bottom-lines for the likes of Admiral in 2024.
Stock pick: London Stock Exchange Group
Trevor Green, head of UK equities, Aviva Investors
London Stock Exchange Group: Aviva’s Trevor Green says he has been a long-term “supporter” of the firm as it has made an impressive transition from “being a pure exchange” into a leader in data and analytics too.
“The Refinitiv acquisition in 2021 was a bold and visionary move by management to take the company into exciting new areas,” he added.
“Large acquisitions especially those completing during the covid pandemic have high levels of execution risk but now as we head into 2024 even the doubters on the reasoning for the deal are having to applaud what CEO David Schwimmer has done in integrating it in.”
He says despite a strong performance recently, the investment case has not diminished with organic growth complemented by the “exciting Microsoft partnership announced in 2022”.
Stock pick: Ashtead Technology
Liberum
Ashtead Technology: Ashtead’s numbers in the first half of 2023 saw yet another beat of the market’s forecasts and triggered an upwards revision for analysts at Liberum.
They say the firm has confirmed that market dynamics continue to remain strong with opportunities for “long term structural growth” across both its offshore oil and gas, and offshore wind markets.
They’re betting on Ashtead to support the “changing requirements” of the global offshore energy sector in the coming years.
Stock pick: 3i Infrastructure and Cordiant Digital Infrastructure
Nick Scullion, partner at Foresight Group
3i Infrastructure: Nick Scullion, a partner at Foresight Group, noted that 3i Infrastructure is their favoured stock in the infrastructure sector given the value of its underlying assets.
3i is an infrastructure investment trust which has a “strong track record” of making significant returns on its investments, he said.
For example, last month it sold Attero, a Dutch waste management company, for a premium of 31 per cent. The market has “fundamentally mispriced” 3i, Scullion said.
Cordiant Digital Infrastructure: Scullion also picked Cordiant Digital Infrastructure – which operates data centres, cell towers and fibre optic networks – as a stock to watch in 2024.
“Cordiant has a strong management team with a track record of acquiring high quality assets at attractive valuations,” he said.
The firm is also well placed to exploit the rapid growth in demand for data storage. It currently trades at a discount to NAV of 32.5 per cent.
