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InterestingLeigh – Potential investment trends of 2014

Leigh Himsworth, head of UK equities at City Financial and manager of the City Financial UK Select Opportunities Fund, provides commentary for December

“It is not in the stars to hold our destiny but in ourselves.” William Shakespeare

For Christmas this year, many investors are hoping Santa Claus lets them continue to ride on the crest of the liquidity wave into 2014. At the risk of neglecting our Christmas shopping, we’ve been taking time this month, to mull over the year behind us and begin to identify the potential investment trends of 2014. Here are some of those on our watchlist and how we think UK companies might benefit…

Despite Roy Hodgson’s optimism and his prior World Cup credentials managing Switzerland, with England at 25-1 we will be looking for value elsewhere this summer.

The bookmakers are in line to trade well, given the football World Cup, but which of them will get the Golden Boot? GVC is the largest online gaming company in Latin America and has already ramped up its TV ads in anticipation of a busy summer.

Goals Soccer Centres, operator of outdoor football centres in the UK, and now with an established presence in the USA with a site in Los Angeles, is outperforming its two major competitors and looks set to benefit from the ‘soccer’ boom in America. With a more favourable winter climate compared to last year, and a boost from the World Cup, it could easily see earnings growth exceed expectations.

Other companies that could be celebrating are the pub groups. Brazil are only a few hours behind UK time, and broadcasters have already renegotiated the time of England’s opener against Italy to a more suitable hour for fans watching at home. Marston’s saw improved earnings in 2013, which were driven by pub restaurant expansion, and the group offers Sky sports throughout their portfolio. JD Wetherspoons, on the other hand, has exposure to more of the big city locations; however, traditionally, they haven’t shown sports, mainly due to a lack of Sky licensing. We’ll watch this space to see whether they intend to screen the big games.

2014 will see the referendum on Scottish independence.

Whilst this event will undoubtedly have major ramifications for sectors as diverse as defence to oil and gas, it’s difficult to predict how these might play out. One company that we think could benefit whichever way the vote goes is STV. Scotland’s equivalent to ITV, the company has been a winner in 2013, with popular programming and digital revenue growth proving its worth. If Scottish independence means Scotland lose access to the BBC, there may be further scope for expansion of STV.

Activity in North Sea Oil & Gas is set for further increases, not least due to the agenda of the Scottish Independence Party.

Augean, a leader in hazardous waste management, in 2013 developed the vertical integration of their North Sea Oil & Gas business, which recycles both chemical and oil based wastes. Their sites in Aberdeen and Redcar mean they are well positioned to help oil companies safely (and cost effectively) dispose of their deposits.

At the end of November, Dubai was selected to host the World Trade Expo in 2020.

It celebrated in style with fireworks from the Burj Khalifa. Hyder Consulting, expert construction and engineering consultant, worked on the design of the world’s tallest building, as well as Tower Bridge in London. With 28% of 2013 revenues coming from their Middle East division(1), they should be well positioned to benefit from the £14bn Dubai authorities estimate the event will generate from new projects.

3-D printing - here is a sector with huge potential for growth.

In the US, pure-play 3-D Systems Corporation, who invented and developed the technology, has delivered returns in excess of 450% over the past five years(2). With the rise of domestic applications for the product, including printing iPhone covers and metal tools, the company has added to their primary customer base of manufacturing companies. As a flavour of where the technology could go, here are some anecdotal examples (take with a tablespoon of salt!):

  • Belgian bio printing facility has printed a new jaw for a Belgian woman and is looking into printing fully functional organs
  • Architects in Amsterdam are currently building a house using only printed components
  • In September, NASA announced they are sending a 3-D printer into space to help reduce cost of shipping spare parts to space stations!

This is all very well, but is there a reasonable way to gain exposure to the sector through UK companies? Rolls Royce and BAE are amongst UK corporates who use 3-D printers in their R&D labs to test new technology, but they don’t have material exposure to the technology. Manufacturing firms are the more likely beneficiaries and, even there, we are yet to see major adoption. Renishaw’s broad product suite and precision machining lends itself to 3-D printing, while one company that has already expressed a meaningful interest is GKN. 3-D printing requires powder sinter to print metals, and GKN’s Powder Metallurgy division is the world’s leading manufacturer of sintered components.

We expect a host more surprises to be negotiated as the year unfolds.

We end November with 53 stocks, 27.4% in FTSE 100, 40.4% Mid 250, 28.1% Small Cap & AIM, 4.1% cash and a festive joke:

A few days before Christmas, two young brothers were spending the night at their grandparents’ house. When it was time to go to bed, and anxious to do the right thing, they both knelt down to say their prayers. Suddenly, the younger one began to do so in a very loud voice.

"Dear Lord, please ask Santa Claus to bring me a play-station, a mountain-bike and a telescope."

His older brother leaned over and nudged his brother and said, "Why are you shouting your prayers? God isn't deaf."

"I know" he replied, "But Grandma is!"

1) Source: Hyder Consulting
2) Source: Bloomberg