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It is easy to find the courage to buy shares when the stock market is booming and the economy’s outlook is ebullient. After all, investors’ fear quickly turns to greed when profits are rising.
It is much more difficult, though, to invest in shares when stock markets and the economy face a less sanguine outlook. At such times investors typically become riddled with fear.
In Questor’s view, this makes them far too risk averse at the precise moment when buying opportunities are at their most plentiful. All investors would like to buy tomorrow’s winners today.
But to achieve that goal means buying shares when they are priced at low levels as a result of a weak near-term outlook for their industry or the wider economy.
For example, Brooks Macdonald, a holding in our Inheritance Tax (IHT) Portfolio, offers the potential for significant long-term capital gains. The investment management company is essentially a leveraged play on the stock market, since it charges a percentage fee of the value of the assets it manages.
All else being equal, revenues rise when asset prices surge and fall during a stock market slump. The prospects for the economy are improving.
Inflation is expected to fall to below 3pc within a year, further interest rate rises are likely to be limited, and Britain’s economic growth is forecast to increase from 0.4pc this year to 1pc next year.
Alongside an increasingly buoyant global economic outlook, this should prompt improved investor sentiment towards shares. Yet Brooks Macdonald’s shares continue to fall. They have lost 18pc in the past month and now trade at about 11 times forecast earnings.
This suggests there is significant scope for long-term capital growth as revenues and profits rise in the next stock market boom. Its recently released annual results showed that its financial performance had been disappointing during a tough period for the economy.
Although revenue rose by 1.3pc year‑on‑year and funds under management grew by 7.5pc to £16.8bn, underlying profits fell from £34.5m to £30.3m as a result of reduced profit margins.
On an underlying basis, margins were 3.7 percentage points lower year-on-year at 24.5pc thanks to rising costs in the current era of high inflation.
Importantly, though, the company is exploiting industry challenges to strengthen its market position. Two acquisitions were concluded during the year, while it continues to seek further opportunities to complement organic growth.
Dividends, meanwhile, were raised by 5.6pc to 75p per share in what is their 18th consecutive annual increase. A yield of 4.6pc further suggests that the company’s shares are undervalued following their recent decline.
While Brooks Macdonald trades 19pc lower than when it was added to our IHT portfolio in August 2018, it offers a favourable long-term outlook. Demand for the company’s services should rise as the prevalence of defined benefit pension schemes declines and the population continues to age.
As an improving economic outlook makes investors less fearful and as asset prices seem poised to turn a corner, the prospects for the company’s revenues, profits and share price remain upbeat. Hold.
Questor says: hold
Ticker: BRK
Share price at close: £16.5
Update: Anpario
Another of our IHT portfolio holdings, Anpario, is also experiencing a challenging period that should ultimately abate.
The company, which produces natural animal feed additives, released half-year results last month that showed a 7pc fall in sales as a result of lower demand in several key markets.
The company, though, was able to raise prices in response to higher costs and its gross profit margin increased by two percentage points to 43.9pc. This resulted in a modest 3pc fall in gross profits.
The company expects further profit margin improvements in the coming months as raw material price inflation slows and the effects of recently implemented efficiency measures are fully felt.
It also expects demand for its products to increase as an easing of the cost-of-living crisis prompts higher meat consumption.
With net cash of more than £7m, Anpario has the financial means to overcome short-term challenges. Its price-to-earnings ratio of 22 on a forecast basis remains relatively high despite a 50pc share price decline since its addition to our IHT portfolio in June 2018.
But with an improving outlook, it has recovery potential.
Questor says: hold
Ticker: ANP
Share price at close: 262.5p
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