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Three share sectors to watch in 2020

Sophie Lund-Yates, Equity Analyst takes a closer look at three sectors to look out for next year.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Our five shares to watch are companies we feel have specific advantages or opportunities this year.

But there are also social and economic trends that affect whole sectors, and that can create investment opportunities too.

Investments will fall as well as rise in value so you could get back less than you invest. If you’re not sure if an investment is right for your circumstances, please seek advice.

1. Food retail

Most recent data shows the average UK household spends over £60 a week on groceries. That’s over 10% of total household spending, excluding mortgage repayments and council tax.

Feelings towards British retail have been negative for a while, and food retail has been taken along on that ride. But we don’t think that’s necessarily fair. No matter what happens to the economy, people will still do a weekly shop – so food retailers have tended to be more resilient than those selling big ticket items or fashion.

The marketplace is crowded these days, but the big players like Tesco have some significant competitive advantages.

The group’s put in the hard work reforming margins, thanks to deals with Booker and Carrefour resulting in big cost savings. Added to that, Tesco now owns rather than leases most of its stores, unlike many of its high street retail relatives.

It is a time of big change though, as the CEO who made it all happen is stepping down next summer. New man Ken Murphy should at least benefit from a far sturdier spring board from which to launch his strategy.

Food retail has, so far, avoided disruption from major digital rivals and this presents an opportunity for grocers. Morrison’s own offering falls short in comparison to peers at the moment, but the group recently tightened ties with Amazon as the online giant tries to improve its grocery business. It’s early days, but looking ahead, that could be a good place to be.

Overall, food retail could be a sector to consider for those looking for a slightly more defensive retail option. Especially with sentiment subdued at the moment, now could be the time to take a trip down the food aisle.

Tesco share price, charts and how to trade

Morrison share price, charts and how to trade

2. Paper

Paper’s been around since ancient China, but we think it presents a very current opportunity for investors.

While retailers have suffered from the rise of e-commerce, it’s been good news for packaging companies. Add in a consumer base that’s more environmentally-minded, it’s particularly good news for paper packaging companies. Paper packaging is a growing market, and something we kept in mind with our choice of DS Smith in our five shares to watch for 2020.

Apart from the growing sector, we’re fans of DS Smith’s position in the market. Packaging volumes will ebb and flow depending on how well the economy is doing. But DS Smith’s many consumer goods customers, add a layer of protection, as these revenues can be more reliable, even if economic waters get a bit choppy.

There’s a little more debt on the balance sheet than we’d ideally like. This is expected to start coming down though. Still, for those that fancy a balance sheet in ruder health, Mondi’s the other UK player in paper.

Mondi comes in a bigger package, and has more exposure to emerging markets than some, which could be a source of longer-term growth. It’s worth keeping in mind though, Mondi’s customer base is more industry-focussed. That gives it an advantage when economies are doing well, but means it could be hit harder by a slowing economy.

All major packaging companies feel this to some extent. And volumes have been sluggish lately, which has contributed to lower valuations for some of the big names in the industry. Overall though we think the structural growth opportunities make the sector attractive.

Find out more about DS Smith in our 5 shares to watch for 2020

DS Smith share price, charts and how to trade

Mondi share price, charts and how to trade

3. Building materials

Building and construction is cyclical. With so much economic uncertainty around, you might be surprised to see building materials on this list.

But suppliers of materials needed for construction are quite different to the companies actually doing the building.

Take housebuilders. They’re facing rising costs, and house prices are a little sluggish. If these companies see margins faltering, they could decide to ramp up volumes. That’s good news for those making building materials, who care more about volumes, than what house prices are doing.

This was an advantage we identified in Ibstock, which is another one of our five shares to watch for next year. Ibstock’s the UK’s largest brick manufacturer and wider brick shortages mean it’s been able to put its prices up lately. Not only that, but the UK still faces a major housing shortage, so demand for new builds and their bricks is unlikely to disappear.

But if bricks aren’t your thing, consider Grafton which has a broader repertoire.

Most of its sales come from its builders’ merchant business. Trends here have been weaker, as worries about the economy have put people off sprucing up their homes. But this shouldn’t go on forever, and we think the underlying business could strengthen from here.

Disposals of less profitable plumbing and heating businesses means Grafton is now more streamlined, which could mean stronger margins in the long-run.

Fundamentally, we think the UK is still invested in owning and improving houses – and while that’s the case, companies that provide the goods to make that happen stand to benefit.

Find out more about Ibstock in our 5 shares to watch for 2020

Ibstock share price, charts and how to trade

Grafton share price, charts and how to trade

Hargreaves Lansdown’s Non-Executive Chair is also a Non-Executive Director of Tesco.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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