Share tips for 2018 from Justin Urquhart Stewart

What will 2018 hold for the banks? Justin Urquhart Stewart talks share tips, favourite sectors, passive versus active funds and where he thinks the FTSE 100 will end next year.

Which sector are you backing for 2018?

I think 2017 gives me an opportunity of looking at one area which I have been interested in before, but I think now gives us some better opportunities.

That’s going to be financials. Looking at the banking sector. Why? Well, various things have happened.

We’ve actually had banks where they have had their various stress tests. Now, stress tests in the past used to be a bit of a joke, now we’ve seen the Bank of England doing some pretty serious stress tests.

So, we can divide these banks into two groups: those who are domestic and those who are international. Domestic – the likes of Lloyds (LLOY) and RBS (RBS) – and those who are overseas: HSBC (HSBA) and Standard Chartered (STAN).

So, if you think the global economy is going to be improving, particularly in the Far East, those last two are going to be very positive.

Equally, if you look at the UK, Lloyds has been recovering significantly even so has RBS. With interest rates rising that means these banks have the opportunity for a bit more profitability, so that gives them some greater strength. So I’m looking at that sector for 2018.

Do you still like Barclays and BHP Billiton?

Yes, I had to swap half way through the year because Dixons Carphone (DC.) was going nowhere and was looking worse, however, swapping to Barclays (BARC) I still think something strategically has to happen at Barclays.

I believe it will break in half between an institutional bank and a commercial bank, but it hasn’t happened yet, so I’ll have to wait and see.

BHP Billiton (BLT) still, although it’s been an awkward one of all the commodity players, actually it’s showing signs of improvement, so I still like those. But I think it’s time to move on to some other ones for 2018.

You bailed out of your 2017 tip Dixon Carphone in August, just before a major profits warning. What’s your share tip for 2018?

I’m going to stay with my financials – I’ve got two which I think I particularly prefer. Of the international ones I could have Standard Chartered or HSBC. I think HSBC has been through a lot of bad news, and I think is now looking to recover quiet well indeed.

Standard Chartered’s the smallest and slightly weaker one, so I will stick with HSBC, but, domestically, the choice is between RBS and Lloyds.

You never know with RBS. Has all the poison come out? But Lloyds, well, I think they’re actually looking significantly on the road to recovery with rising interest rates, and there’s going to be a better dividend. No, those are my two picks for the year.

Are you concerned with the growth of passive investing? Will active managers stand out in 2018?

Passive investing has always been a great benefit to people if they know how to use it. It doesn’t solve everything, but it keeps active managers honest because they have actually got to beat the index.

So, if you can invest in the index, at least you know what you’re going to get, but if they can beat the index, so much the better. Trouble is, most of them can’t. So, what it’s done is it’s winnowed out the weak ones and the good ones have to prove their mettle.

So, I like always having a combination of the two. Using the index, which allows me to buy in and out of the portfolios without disturbing the managers, then very carefully selecting managers who have a proper track record to be able to benefit there.

So, some volatility could be a real benefit to those active managers in specific, very specialist areas.

That’s what I want the managers to do. I don’t want broadly based ones, but the ones who can give very specific exposure to the areas I don’t know about so well. The indices, trackers, and ETFs give the ability to cover border areas, very cost effectively and with flexibility, that’s the advantage.

A year ago, you guessed the FTSE 100 would end 2017 at 7,350. Great Call! Where will it be in a year’s time?

I think we are going to see some dramatic moves – sideways. I can see actually 2018 being in a position where we’re going to see quite a bit of volatility as markets do go up and down.

Once we hit the volatility it will then continue for a while. But at the end of that, I suspect there’s a very good chance we’ll end up exactly where we started.

So, I think it’s going to be one of those years where you appreciate your dividends, enjoy your compounding, but actually end up at round about the same level as we started this year.

Here’s the link to the original video from which this transcript was taken.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.