BROKERS’ NOTES: Buy BAE Systems, sell Anglo American

David Shapiro, chief global equity strategist: Sasfin Wealth

Buy: BAE Systems

With the US Federal Reserve opening the way for one, possibly two rate cuts this year, and with other countries following as well, I think it’s going to be very good for equity markets. BAE Systems is an advanced technology company that develops products for the defence industry. And in the circumstances we find ourselves now, with an improvement in the UK and European economies, I think we’re going to see the need to up defence spending — not aggressive defence spending; this is more self-protection, particularly against the threat of Russia. And if Donald Trump comes into office, he’s not going to keep funding Nato. So I think we’re going to start to see some increase in funding. BAE is one of these businesses that is well run, it has outperformed the FTSE 100 index and it generates a lot of cash. It buys back quite a few shares, but it also pays a very attractive dividend. And in the UK, there’s no withholding tax, so what they pay is what you get. So it’s one to watch, particularly in the environment we’re going into.

Sell: Anglo American

I’m very worried about Anglo American, and I see it’s fast losing that BHP bid premium, which sent it upwards; it’s slowly giving back all those gains, and management has decided to go it alone. Generally, commodity shares are under a lot of pressure, even against this backdrop of central banks indicating that monetary easing is ahead. I think success is going to be in the execution of this very complex restructuring plan that Anglo wants to go ahead with, and this is not easy. It’s not easy because commodity markets are notoriously difficult to read. And they haven’t got the margin to get it wrong. So I’m quite worried about where Anglo is going to find itself generally in trying to get rid of Amplats and De Beers, and some of the other assets it has.