2012 might be grim. These 5 ASX shares offer some protection, writes The Motley Fool.
If you're the nervous sort, a recent presentation by Bill O'Neill, the European chief investment officer at Merrill Lynch Wealth Management, won't have made comfortable reading. And Mr O'Neill was nothing if not blunt in his assessment of where the world stands:
- Global growth and profits will be weaker in 2012
- Quantitative easing will become a global phenomenon
- China will have a 'soft landing'
- Global manufacturing slump in 2011 to be followed by slow recovery in 2012
- The eurozone sovereign crisis is also a banking crisis
If there's any good news in that at all, it's that China's sudden slowdown will end in a soft landing, rather than an abrupt crash into the buffers.
In short, sums up Mr O'Neill, "the pressing need for mature economies to contain their debt burdens has taken us to the edge of a second global recession in less than three years".
Bleak appraisal
The trouble is, Mr O'Neill is far from alone. Recently, for instance, Christine Lagarde, head of the International Monetary Fund, spoke of a "gloomy" world economic outlook.
"There is no economy in the world that is immune from the crisis that we not only see unfolding, but escalating," she insisted.
Even more shockingly, ratings agency Fitch has downgraded six of the world's leading banks — including Bank of America, Goldman Sachs and Barclays. This comes on the back of S&P downgrading Australia's big 4 banks, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Group (ASX: WBC).
Go for quality
So where should investors shelter from such chill winds? Not surprisingly, Mr O'Neill isn't short of suggestions for where not to invest. Close to the top of the list: sovereign debt, including United States treasuries and eurozone bonds.
Instead, he's recommending equity investments — especially American and United Kingdom stocks, rather than eurozone and Japanese ones. He's cautious on China, too, until economic policy direction becomes clearer.
For although Japan's growth should recover in 2012, corporate earnings are likely to disappoint, he reckons. And while eurozone equities are cheap and sentiment toward them is at rock bottom, it is too early to invest in the region due to its high risk.
"In selecting equities in 2012, we are recommending a focus on large cap companies with strong cash flow and growing dividends," says Mr O'Neill. "Despite shrinking opportunities for portfolio diversification, investors should focus on yield and quality, while aligning their portfolios to allow critical longer-term growth themes to be captured."
Five picks
It's not difficult to spot companies that match what he's looking for — especially given the clue that consumer discretionary, consumer staples and information technology are the three preferred sectors.
These sectors, reckon Mr O'Neill, offer the best combination of earnings quality, valuation and alignment with the macro environment.
We agree with Mr O'Neill, but would also suggest stocks in the utilities sector. After all, we still have to pay our power and gas bills, and airports will still need to operate (even if airlines struggle).
So here, then, are five diversified blue chips that look to me to meet Mr O'Neill's requirements:
|
Company |
Forecast yield |
Forecast P/E |
Market Cap |
| Coca-Cola Amatil (ASX:CCL) |
4.8% |
15.2 |
$8,970m |
| Metcash (ASX:MTS) |
6.9% |
12.0 |
$3,186m |
| MAP Group (ASX:MAP) |
7.5% |
30.4 |
$5,118m |
| Telstra (ASX:TLS) |
8.6% |
11.3 |
$40,564m |
| Woolworths (ASX:WOW) |
4.9% |
14.5 |
$31,792m |
Large-caps, with a solid dividend growth record and a decent yield, each of these looks a reasonably safe bet.
A couple are on the pricey side, perhaps, but heck — it is all about quality. Don't fancy MAP Group? Throw in Spark Infrastructure (ASX:SKI) at a lower price and similar dividend yield.
So there we go — five Australian stocks that meet Merrill Lynch's views on safe stocks for the year ahead.
Are you looking for quality stock ideas? Readers can click here to request a new free report titled The Motley Fool's Top Stock For 2012.
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Motley Fool contributor Mike King has an interest in Woolworths. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.
A version of this article, written by Malcolm Wheatley, was originally published on Fool.co.uk. Mike King has updated it.
