Justin Urquhart Stewart's tips for 2016

Justin Urquhart Stewart gives a contrarian share tip, explains what to do if markets crash and says whether bank and commodity shares will recover in 2016.

An amazing contrarian share tip for 2016

What's your favourite blue-chip and why?

As a company, Seven Investment Management doesn't pick on individual shares, but on a personal basis I always go for the unloved. Sometimes you get it horribly wrong and the unloved turn out to be even more unloved - for example, Tesco.

I like Anglo American: it's a well-managed company that is prepared to make some very difficult decisions, of which some have already been made.

Commodity prices are in a terrible shape; it's not down to demand, it's down to capacity. Will companies be able to cut capacity to make themselves leaner and meaner? Well, Anglo has already demonstrated its willingness to do so. And on that basis, I'll back its management. So, there will be a turnaround from what has been an awful investment last year, to a more attractive one this year.

Where will the FTSE 100 finish at the end of this year?

I love the annual darts match as to where the FTSE 100 is going to be: it's always a ludicrous question because you really have no idea. But if I were to pick a number out of the air, it would be 6,600 because it's a nice round number and after six comes seven and that's the name of my company! It's a guess, but in terms of getting out of those stocks with a reasonable yield, I think that's probably what we should shoot for.

What to do if markets collapse in 2016

Will there be a major market correction in 2016?

Every year we have to consider whether there will be a huge market correction, and the truth is that nobody really knows. What I do know is that there will be volatility and a series of bumps throughout the year. This is now a consistent issue that we see in our markets. What brings it on? Well, we often find that when volumes are a little thinner in the Summer, there is more opportunity for a nasty jolt. This is probably true for the Autumn as well.

"It's unlikely we are going to see a financial disaster; what you are more likely to see are some nasty bumps"

You are either a long-term investor, in which case you look straight ahead and ignore the bumps in the road, or you are in the position where you are going to get some cash back and you are willing to take advantage of these opportunities. And they are opportunities, because the global economy is growing at 3% a year and will continue to do so.

It's unlikely we are going to see a financial disaster; what you are more likely to see are some nasty bumps, which you can use to buy in at a discount. I think that will provide some opportunities. I see some political and geopolitical issues, but in terms of a global crisis, I can't see that yet.

What's the thinking behind your view?

Recent global economic events underpin my view, especially as the US economy has significantly recovered to the extent that it's pushing rates up. The Eurozone economy is also picking up, it still has some fundamental flaws but it's better, and the UK economy has been in very good shape - but, again, it is slowing.

Even in China, as we cut our way through the hyperbole and misinformation, you see an economy that is still growing. Although many emerging economies will still have troubles, especially those producing commodities with dollar debt, the rest of the world will be there. This may sound like a dull picture, but as far as I'm concerned, if 2016 is dull, I'm for that.

What actions should investors take?

Investors should act as usual: for long-term investments you should make sure your money is broadly spread across assets, regions, and not just equities.

"Commodities are still going to be very difficult; I expect companies will move before the prices do"

The bond markets are still going to be very difficult. Why? We are in the position where yields have been dropping, therefore you have had capital gain. As you see these yields start to rise, you might see capital losses. Yields are only going to rise a little bit, but investors should shorten the duration of debt on bonds.

Equities look safer than some of the bond markets, in my view. Commodities are still going to be very difficult; I expect companies will move before the prices do in that particular sector.

If you are a short-term trader, use the cash you have put to one side to take advantage. Last year we had some great opportunities to lock into something as dull as the FTSE 100.

Will banks and commodity shares recover in 2016?

What will be the major themes for equity markets in 2016?

The key themes for 2016 are absolutely fascinating because this is a time of real change. I'm sure we say that every single year, but it's now that interest rates are changing. We have been living on the drugs of quantitative easing (QE) and low interest rates ever since we had the financial disaster in 2008. Now it's beginning to change as US interest rates go up and in due course so will UK rates, although it will take its time.

The other big theme of 2016 will be lower and slower growth, there might even be a whiff of stagnation about it. It's going to be different from last year as the whole economy starts moving away from QE and the life support systems we relied on.

Which sectors could make the headlines?

The key sectors we should look at this year are the ones that were the most controversial last year. The banks are still going to have a lot of problems in them overall; it's not just regulation but also the amount of capital. I would park them to one side; they are still under repair.

"Even though the markets might look quite dull, politically and geopolitically I think it's going to be quite an exciting year."

The other crucial area will be commodities. Prices have been falling all the way round and this has caused a lot of focus, particularly from the FTSE 100, which is very heavy in terms of mining, extraction and oil based companies.

So all of those are very unloved indeed. At some stage there will be a turnaround, although it won't be because of China. It will be because they are taking out capacity. As this capacity gets taken out - we have already seen it with Anglo American and Glencore - you will find the opportunity for some of these prices to stabilise, allowing share prices to recover. It may be too early to do it yet, but action is being taken and the market will try and anticipate that this year.

How politics will have huge effect on shares in 2016

2016 has some crucial events coming up, with the most important being the US election: are we going to end up with a Loony Tune in charge of the country again? I hope not.

In the run-up to the election there will be nervousness, but the American economy will continue to grow because it's largely in the hands of the Fed, not politicians. What we need is a clear and strong leader, we don't want a madman - some of the candidates worry me.

Elections are also coming up in Europe and we are nearing the referendum in the UK [on European membership], which will probably take place in 2017. But the longer we leave it, the more nervousness we will see as those companies looking to invest in Britain bypass the UK to invest in Ireland.

There is one other key issue: China. You have a strong leadership there and an economy that is changing from manufacturing towards the service sector. That's not easy to do with a country and economy of that size, but they have the reserves and the ability to make it happen, so I expect they will.

Even though the markets might look quite dull, politically and geopolitically I think it's going to be quite an exciting year.

Justin Urquhart Stewart is co-founder of Seven Investment Management.

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.