The argument between bears and bulls continues to rage. The UK’s FTSE 100 flagship benchmark is within touching distance of the 6,930 all-time high reached almost exactly 14 years ago (31 Dec ‘99) while the FTSE 250 index stands well above its prior peak. This suggests optimists have the upper hand. The bulls point to signs of improved economic momentum in the West, accommodative central bank policy, UK Government initiatives to boost the Aim platform and smaller companies in general, as well as how attractive equity valuations and the yield on stocks are relative to Gilts. An increasingly vibrant initial public offering (IPO) pipeline also shows how investors are warming again to equities, such as the Royal Mail (RMG) which is set to join the FTSE 100 tomorrow (20 Dec).

Bears are having none of it, even if they are dwindling in number. They insist the economic data will fall in a hole as soon as central banks stop goosing the economy with cheap cash and argue bond yields are artificially depressed by Quantitative Easing so equities are not as cheap as they look. The doubters continue to fret any move by the Federal Reserve, European Central Bank and others to pull back from or even withdraw monetary stimulus could prompt a nasty correction or something worse still. They also worry about currency debasement relative to real assets as Japan and American keep the money printers going. Sceptics chunter about rampant director selling, overwrought sentiment indicators and the absence of any meaningful pause in stock markets’ seemingly inexorable rise for over 18 months as warning signals equities are overcooked.

These cross-currents will continue to ebb and flow in 2014 and to help provide you with a better context for decision making Shares this week highlights what our team of writers thinks will be the most important issues over the coming 12 months. In each case we outline a bull and a bear case, to flag the potential ramifications of our six themes, so you can make a rational judgement of your own and follow up with further research at the sector and individual stock level. We believe the real market-moving stories in the year ahead will be:

? House price inflation and improved construction activity to boost the UK. The fat order backlogs on offer at Costain (COST) are attractive but in the event housebuilders keep running, London-focused Telford Homes (TEF:AIM) looks a valid option.

? Sluggish luxury demand to contrast with improved consumer sentiment in the UK. If the UK economy does get traction, cash could just rotate from high quality growth names like Burberry (BRBY) and into cyclical domestic options such as Marks & Spencer (MKS).

? Asia to outperform Latin America. After a tough 2013, when taper talk left bond markets and currencies spinning, emerging markets may well bounce back in 2014, but a selective approach looks best. Experian (EXPN) is one to avoid in the event of a weak economy in Brazil while money manager Ashmore (ASHM) may be a canny play on Asia.

? Oil prices to fall. It rarely pays to bet against human ingenuity for too long and although peak oil arguments remain potent the shale revolution is boosting supply of precious hydrocarbons. A steady but unspectacular recovery is unlikely to help oil prices either, especially if Iran comes back in from the cold. A weak crude price will be a handicap for BP (BP.) while anyone seeking exposure may be best to do so via BG (BG.).

? Merger and acquisition activity to pick up pace again. Weak returns on cash will put pressure on bosses to act and many will plan a transaction to pep up growth. Healthcare remains an area of hot activity and we can see Plethora Solutions (PLE:AIM) as a bid target while AstraZeneca (AZN) may be a rare example of a deal-maker whose shares are worth buying.

? Income to remain as important as ever. Rotten returns on cash and low bond yields are a nuisance for savers as well as cash-rich corporations. Bond yields may well rise in 2014, should central banks taper or inflation fears take hold and under these circumstances stocks which can grow their dividends tend to do best. Mears (MER) is a good example here. Should deflation fears grip, a fat yield will look perfectly acceptable and SSE (SSE) is a suitably stodgy utility option, despite the political furore over autumn’s round of price increases.

Blowing bubbles

Perhaps one of the biggest worries about markets is the absence of fear. IPOs are flying off the shelf, even if some of the companies in question barely have any revenues, let alone profits, and the UK equity market has yet to witness any correction of 10% of more since summer 2012.

That is highly unusual and is suggestive of the sort of melt-up which turns into a bubble and an eventual disaster. Strategy boutique IR&M regularly publishes what it views as a helpful bubble monitor (see table) and there are some worrying signs.

While the absence of a pull-back is a concern, and there is a risk cheap money encourages wanton speculation and mis-allocation of capital, not all of the bubble monitor indicators are flashing red. Despite the roaringly successful Royal Mail float, when the markets do feature on the front pages it is generally bad news rather than good. The focus is still on scandals involving banks, complaints about utilities’ pricing, the opacity of the pensions industry or some act of corporate malfeasance. The damage done to the market’s reputation by the great crisis and its causes is yet to fully heal, something which encourages Shares to think there could be more upside to come yet. This view is backed up by data from the London Stock Exchange (LSE) website on the daily amount of shares, number of trades and value of deals struck on its platform. The charts (see below) show the year-on-year trend for all three measures and there is no parabolic rise here to suggest a buying frenzy is upon us.

Other ‘soft’ indicators are more troublesome, notably rampant selling of stock by company directors. Each week in Shares we track executive trades (see Director Deals section) and recent weeks provide evidence of an almost indecent dash for the exit as disposals clearly outweigh purchases. This suggests Britain’s boardrooms may not be entirely confident in their charges’ prospects for 2014, or at least they feel share prices may be well up with events.

After all, earnings growth is hardly tearing away. As is normally the case, analysts began 2013 looking for growth in aggregate earnings from the UK market in excess of 10%. As the year draws to a close, consensus is now looking for a 4.7% drop according to IBES, as weak numbers from heavyweight miners and banks take their toll. Given this year’s 12.6% rise in the FTSE All-Share and 10.3% advance in the FTSE 100, this means UK equities are rerating, as the upside is coming from multiple expansion, or a higher ‘P’ in the price/earnings (PE) ratio, rather than improvement in the E.

This process can only go on so long before the multiple becomes unrealistic and share prices snap lower. Surprise, surprise, analysts are looking for 10% earnings per share growth in 2014 and 9% in 2015, again according to IBES.

The ratings game

The good news is UK stocks do not look unduly expensive, particularly relative to their own history.

Equity strategy boutique Mirabaud Securities eschews valuation methodologies which are based upon short-term earnings forecasts and instead looks at multiples based on trend profits. This irons out the worst of the cyclical swings in earnings and also negates analysts’ natural bias to be positive and assume at the start of each year corporate income will rise. Over the past 40 years or so, UK plc has averaged 7% annual earnings growth on a compound basis.

Since 1971, the UK has traded on a median multiple of 14.3 times trend earnings. At the time of writing it stands well short of that, on a rating of just 11.2 times. This at least suggests UK stocks are hardly in bubble territory. It may even point to a market that is still a touch cheap, assuming a normal earnings path and return to that trend line implied by the long-term 7% annual rate of progress.

Earnings have been stuck below trend since 2008 and even applying those 10% and 9% growth forecasts pulled together by IBES for 2014 and 2015, a return to the line is still a little away off. But any whiff of a return to trend and UK equities could look very interesting especially as during real bull runs the market only tends to hit a wall when the trend multiple approaches 19 to 20 times, some 75% higher than the current rating.

Sector rotation

Alex Wright, portfolio manager of Fidelity UK Smaller Companies and Fidelity Special Values (FSV) notes the valuation debate is now more nuanced in an Outlook 2014 piece produced by Fidelity Worldwide Investment. ‘As a contrarian, I have become a little more cautious following the strong market rally,’ he notes. ‘The FTSE 250 and FTSE Small Cap indices are now trading at premiums to their 15-year average price-to-earnings multiples. The FTSE 100 still looks cheap compared to historical averages and this has recently proved a fertile space for idea generation.’

In the view there is some mileage left in the UK market. The key now is to find out how to maximise what upside there is on offer. This is where sector performance trends can help isolate ideas to research. The table (below) outlines the full list of 39 sectors which comprise the FTSE All-Share. The top ten rankings for 2013 are packed with cyclicals like Automobiles & Parts, Forestry & Paper, General Retailers and Household Goods & Home Construction. Down in the bottom ten, classic defensives such as Electricity, Tobacco and Gas, Water and Multi-Utilities lie trapped, alongside the miners, doomed to fill the bottom two slots for the second year in a row.

The move into cyclicals and domestic-facing ones at that, notably retailers and the housebuilders is a theme which chimes with Fidelity MoneyBuilder Growth fund’s James Griffin. ‘I have been positive on UK companies for some time now and I’ve shifted the portfolio away from international franchises towards industry winners that have a more domestic focus,’ he asserts in the Outlook 2014 document. He flags financials as one area to note should a cyclical upturn truly take hold, although he does describe the recovery as ‘tentative’ and concludes: ‘We need to see some follow-through from the housing market recovery.’

Early cyclicals are this year’s leaders, although some shift toward mid and later-cycle areas is already discernible and perhaps understandable after the good run enjoyed by the market’s racier elements. Fidelity’s Griffin expects to see further sector rotation in 2014 and beyond. ‘As the recovery gains traction and we move away from cyclical and emerging markets-led growth, I would expect growth to become repriced as it becomes harder to find. I think that areas such as the digital economy will benefit from this shift, as will the pharmaceuticals space as investors begin to ascribe value to their new drug pipelines that are looking stronger now that they have been for many years.’

Shares also has a preference for developed over emerging market growth and many of our big six themes for 2014 also leave us in agreement with Griffin. ‘While politics have clearly been beneficial for the housing sector, other areas have not benefited from political interference - the utilities sector is one that I am very cautious of. I also remain cautious on the commodities segment, as I see significant supply/demand imbalances that are unlikely to correct in the near term. I am also cautious on the retailers, both food and non-food. I feel that the challenge posed by the internet to bricks-and-mortar retailers is significant and not fully appreciated by the market.’

This all supports our downbeat view of oil and Latin American plays, our liking for merger and acquisition candidates in pharmaceuticals and clear preference for stocks that can grow their dividend rather than dull utilities to generate income. To help you decide whether our themes are valid, or even whether we are wrong and you should consider the diametrically opposing view, the following pages outline our thesis and then how you could consider accessing or going against it.

THEME #1

House price inflation and improved construction activity to boost the UK

As evidence of a sustainable recovery here in the UK starts to stack up, an ebullient housing market and the tentative signs of the cycle turning higher in the wider construction sector are likely to be key investor themes in the year ahead.

House-price inflation is one of the key drivers of value and share price sentiment in the housebuilding and property sectors and further gains are likely in 2014. The December Economic and Fiscal Outlook from the Office for Budgetary Responsibility states: ‘We expect house price inflation to be above 5% in 2014 and 7% in 2015. Relative to our March forecast, we have revised the level of house prices up 10% by 2017-18,’ they said.

The OBR dampens talk of a bubble but the Government and HM Treasury seem alert to the danger, as last month’s withdrawal of Funding for Lending cash from the mortgage market suggests (28 Nov). This may cool the housing market a touch and with many housebuilders trading at big premiums to net asset value, there may be better momentum to be had in other parts of the construction industry. The November Markit Construction Purchasing Managers’ Index (PMI) reading of 62.6 showed the fastest increase in sector output since August 2007 (3 Dec) as commercial and civil activity began to blossom. (SFl)

COSTAIN (COST) 279.5p

While much of the mood music from the government’s fourth National Infrastructure Plan could largely be described as aspirational, the report nevertheless highlights the strategic importance of roads, rail, aviation, ports, energy, flood defences, waste and water. All of these areas are covered by Costain’s (COST) civil infrastructure strategy.

A record forward order book of £3 billion locks in over £700 million of the £948 million consensus revenue forecast for 2014 and the contract wins are pouring in.

The Maidenhead-based builder announced its eleventh Crossrail business win last month (25 Nov) in a deal worth £30 million to construct Paddington New Yard between Crossrail’s tunnels and the Great Western railway. The £187 million cap’s appointment to Severn Trent’s (SVT) AMP6 (asset management period number six) programme earlier this month (9 Dec) is worth about £250 million over the framework contract’s 2015 to 2020 lifespan. A forward price/earnings ratio of 10.4 and a 4.2% yield both look tempting given the visibility. (SFl)

Telford Homes (TEF:AIM) 338.5p

While fears of a nascent housing bubble are probably exaggerated, the authorities do seem wary of one and with valuations full the best of the housebuilders’ run may be behind them for this cycle. Even so, the premium commanded by homes in London and the South East still represents a significant opportunity for housebuilders with exposure to the region. Telford Homes (TEF:AIM) is one firm well placed in this context and a March 2015 price/earnings ratio of 13.0 seems reasonable.

Strong interims (27 Sept) saw Telford outperform on a variety of metrics. Operating margins rose to 13.2% from 9.7% the previous year and for the first time in the group’s history net debt was eliminated. An 85% increase in the interim dividend to 3.7p is a further consideration but the efficacy of the group’s landbank strategy is an even more significant sweetener. According to broker Shore Capital the £206 million cap’s ‘land bank has grown by around 23% (to 2,790 plots) in the last six months and land with planning is now in place to cover over 98% of completions in our forecast period to March 2016.’ (SFl)

THEME #2

Sluggish luxury demand to contrast with improved consumer sentiment in the UK

Uncertainty clouds the outlook for luxury market growth in 2014, as some concerns linger over emerging markets. If economic momentum accelerates in the West then expensive quality growth names could be replaced in the portfolio fashion stakes by cyclicals. An anti-extravagance crackdown on gift giving to politicians and other officials in the Peoples’ Republic of China appears to be impacting spend on everything from luxury fashion to high-end spirits, while structural moderation in China looks set to continue on the back of diminishing new retail space growth. Though Chinese appetite for luxury is anything but sated, slowing demand could trigger downgrades for companies ranging from Diageo (DGE) and Richemont (CFR:VX) to LVMH (MC:FP) and Burberry (BRBY), the quintessentially British brand famed for its high-end trenchcoats and leather bags. If this cooling of the Chinese economy continues, investors might consider a tactical switch into FTSE 100 retailers exposed to the gathering economic recovery in the UK. Though the consumer remains hard-pressed, with inflation outstripping wage growth and energy bills crimping disposable spend, increased confidence could boost the numbers at retailers including High Street bellwether Marks & Spencer (MKS). (JC)

Marks & Spencer (MKS) 466.5p

Gently growing consumer confidence in the UK would boost High Street icon Marks & Spencer (MKS). Boss Marc Bolland is under pressure to revive M&S’ fashion arm, especially its womenswear offering and Christmas will be crucial in determining the success of its new Autumn/Winter ranges. Away from fickle fashion, M&S can count on its food business, as well as its growing international and multi-channel operations.

The current fiscal year is the last of a period of hefty investment in the retailer’s turnaround. Operational improvements twinned with lower spend should see M&S become far more free cashflow generative from 2014-15. Based on this year’s consensus earnings and dividend estimates of 33.5p and 17.6p respectively, M&S also looks decent value on a prospective price/earnings (PE) ratio of 13.9 with a 3.8% yield. (JC)

Burberry (BRBY) £14.98

Sentiment towards British luxury leader Burberry (BRBY) will be largely dictated by the market’s view of China, especially as investors are still digesting the shock news (15 Oct) chief executive Angela Ahrendts is set to depart by mid-2014. Thereafter, the £6.6 billion cap will be guided by chief creative officer Christopher Bailey, who is clearly going to be busy.

Burberry managed to maintain adjusted profits at £174 million in the first half, as interim revenues topped £1 billion for the first time. While growth in travelling Chinese luxury customers and opportunities to boost like-for-like sales exist via a focus on e-commerce, Burberry’s growth could disappoint if the hitherto resilient luxury sector cools in 2014. Increased marketing spend arising from the direct operation of fragrance and beauty and the need to invest in Japan, following the decision to close its licence there, could weigh on margins too. Burberry warned on profits in late 2012 and luxury spending softness in 2014 could force the retailer to cough up another alert, which may explain why eight brokers are sitting on the fence. (JC)

THEME #3

Asia to outperform Latin America

The experiences of 2013 show how sensitive emerging markets are to any talk of Federal Reserve tapering or an easing of stimulus, even if the long-term growth stories are good, finances generally sound and valuations attractive. Should the Fed become less accommodative as unemployment drops and inflation rises, this would also surely signal a return to more normal growth patterns in America and the developed world, a trend which could suck cash out of emerging bond, equity and currency markets and back to their Western counterparts.

A further consideration is the prospect of sluggish commodity prices, as supply and demand are yet to come into balance for many raw materials after a huge capacity splurge. This will not help the emerging powerhouses of Latin America, especially Brazil, but could assist net buyers such as China. Indonesia and India are both fighting their way back from the brink of current account crises and lower commodity costs will help them a lot, too, as they build on the good work forged in the form of pre-emptive interest rate rises designed to bolster currencies and tackle inflation.

Brazil is still wrestling with softer growth and above-target inflation, even after six straight interest rate increases and our preference is for Asia over Latin America in 2014. (SK)

Ashmore (ASHM) 385.0p

If you believe East Asia represents the growth hotspot of choice in emerging markets (EM) then debt specialist Ashmore (ASHM) could be a prime play for the year ahead. The firm proved remarkably resilient during the summer’s bout of taper talk as a reflection of Asian investors’ growing desire to adopt a home-country bias, diminishing the importance of hot-money flows from the West, whose exit precipitated the area’s financial crisis in 1997.

A serious wobble in emerging markets to match those of summer 2012 and 2013 could prompt some short-term client fund outflows but overall the trend here remains strong. Ashmore pulled in a net $13.4 billion in 2013 to the end of June, despite an overall flat investment performance of $0.3 billion. A first-quarter trading statement (10 Oct) revealed assets under management (AUM) rose $0.6 billion in the three months to 30 September. It is hard to find a bear of the stock and given its market position, reputation and track record we can see why. (SK)

Experian (EXPN) £11.15

If our perspective on Latin America is borne out this could be a problem for credit checking agency Experian (EXPN) which generates a fifth of group sales from the continent. Brazil, in particular, could be the cause of discomfort in 2014 as concerns about inflation could dampen consumers’ willingness to seek credit.

Experian acknowledged the threat at its interim results (6 Nov), saying credit was growing more slowly in Brazil. We believe the risk remains at elevated levels and leaves Experian looking vulnerable to a sharp share price correction given that it trades on 20 times forecasts earnings for the year to March 2014. Broker Goldman Sachs last month downgraded the £11.3 billion cap to ‘sell’, saying lower growth in Brazil was likely to crimp organic sales progress at the company. The other problem is Experian’s large acquisitions in healthcare and fraud prevention leave its balance sheet looking a little stretched while the benefits of the deals may not be felt for several years. On this occasion, the consensus looks too optimistic, unless Latin America stages a remarkable recovery. (DC)

THEME #4

Oil prices to fall

The potential for supply disruptions to dissipate and an anticipated ramp-up in US shale oil production point to a weak outlook for crude in 2014. We think BG Group (BG.) is the best oil and gas play to ride out this volatility while BP (BP.) could struggle in such a scenario.

Deutsche Bank has lowered its forecasts for both the European benchmark Brent and US yardstick WTI to $97.50 and $88.75 a barrel respectively, some $10 lower than the 2013 average in each case.

The interim deal between the West and Iran over its nuclear programme raises expectations for a normalisation of exports from Tehran. These have dropped by 60%, equivalent to roughly 1.5 million barrels of oil per day owing to Western economic sanctions. Libya may also see some more of its pre-Arab Spring output come back onstream.

A renewed escalation in tensions with Iran would threaten our core scenario, while production cartel Opec could bring its quotas down to absorb any increase in Iranian and Libyan exports. The other possibility is shale oil output fails to deliver on the expected build of one million bopd. Even so the risks for the oil price look weighted to the downside next year. (TS)

BG Group (BG.) £12.37

Decent growth prospects and less material exposure to oil prices are reasons to warm to BG Group (BG.). Of particular note is the company’s performance on a key industry metric, the reserve replacement ratio (RRR), which measures the extent to which a company replaces the hydrocarbons it produces with new reserves. BG’s three-year average is 217%. Both BP and Royal Dutch Shell (RDSB) have RRRs of less than 100%. The greater visibility implied by this yardstick justifies BG’s premium valuation of 13.7 times 2014 consensus forecast earnings per share of 90.2p. Look for an update on the 2013 RRR alongside the prelims (4 Feb).

Progress on its Queensland liquefied natural gas (LNG) project and the massive oil fields offshore Brazil will also be an important driver of the share price in 2014.

Oil prices themselves should be less significant. In 2012 nearly 70% of the group’s production was natural gas. In the US the Henry Hub gas price is still low relative to its history due to the supply glut created by the exploitation of shale gas but globally this market is in better shape. (TS)

BP (BP.) 473p

Over the coming 12 months BP (BP.) could face the double-whammy of lower oil prices and, four years on, the final fall-out from the Gulf of Mexico oil spill.

A new phase of the civil trial, the second of three, began in autumn (30 Sep). It will help determine how much BP pays in penalties under the federal Clean Water Act. The company says it believes the total will be around $3.5 billion but if it is found grossly negligent then the cost could run as high as $18 billion.

An outcome on the first two phases of the trial is expected early in 2014 ahead of a final leg which will determine BP’s exact penalties. With a settlement ahead of this ultimate ruling pretty unlikely the uncertainty could hold back the share price. A decline in oil prices would be a further handicap as it would weaken year-on-year profit and cashflow comparatives. (TS)

THEME #5

Merger and acquisition activity to pick up pace again

One area where further deal-making activity looks very likely in 2014 is healthcare, as large international pharmaceutical and biotech companies scout around for products. They are looking to replace revenues lost to the patent cliff, where a drug’s exclusivity period expires and generic manufacturers can step in and steal valuable market share. Some firms will also be looking to increase their presence in the US should uncertainties over the Obamacare programme ease and more Americans use the complicated system to buy or upgrade their health insurance.

Activity levels were high in 2013, as evidenced by Amgen’s (AMGN:NDQ) $10.4 billion summer lunge for Onyx Pharmaceuticals and moves by Cubist Pharmaceuticals (CBST:NDQ) to acquire Trius Therapeutics and Optimer Pharmaceuticals in September and October respectively. (MD)

AstraZeneca (AZN) £34.47

Pharmaceutical giant AstraZeneca (AZN) looks poised to make further purchases to boost its pipeline and combat the loss of exclusivity on some of its drugs. Overall, a fifth of group sales are at risk by 2015 and half by 2019.

Any takeover brings risks and the company’s deal-making record is chequered but the market may respond favourably to any sensibly priced deal that boss Pascal Soriot authorises in favour of the abandoned share buyback programme.

Purchases already made in 2013 include Spirogen, an oncology biotech that focuses on antibody-drug conjugate technology for an initial $200 million (15 Oct) and Amplimmune, a developer of novel therapeutics in cancer immunology.

Consensus expects EPS to slide 22% for 2013 and by a further 8% in 2014. Consolation comes in the form of Soriot’s self-help programmes, a focus on pipeline development and the stock’s lowly valuation. A 2014 price/earnings multiple of 12.3 times looks to factor in much of the bad news while the 175.5p forecast dividend is 1.6 times covered and at £34.47 represents a 5% yield. Consensus may just be too bearish. (MD)

Plethora Solutions (PLE:AIM) 12.1p

Male sexual health specialist Plethora Solutions (PLE:AIM) is one UK minnow that may already by on the radar of several large global drug companies. The £50 million cap is developing a single treatment, a premature ejaculation spray called Prilocaine Lidocaine Plethora.

The treatment has marketing approval in Europe and can now be sold across the region’s 28 member states where the company estimates there are 45 million sufferers of the condition. Prilocaine Lidocaine Plethora is expected to generate sales of £48 million, based on a launch across just five countries, broker Hybridan estimates.

Plethora intends to submit the treatment for approval to the Food & Drug Administration in the USA in the first half of next year.

For a company Plethora’s size the potential of its product is a crucial factor for investors when deciding to back the stock. The company is meeting a need where there is a lack of suitable treatments, and has an offerring larger companies would pay to own in their search to replace lost income. (MD)

THEME #6

Income to remain as important as ever

In the belief Government bond yields will keep rising whether the Bank of England starts to tighten monetary policy or not, it seems sensible to focus on firms which can grow their dividends and not just make a fat, unchanged distribution. Gilt yields may increase if the Old Lady of Threadneedle Street hints at a less accommodative stance. They could go up if the market senses a decent recovery or the risk of inflation as the central bank overdoes it with the cheap money. As the yield on the 10-year Gilt rises from the 2.9% mark prevalent at the time of writing, that will close the gap between the overall 3.8% yield available on the FTSE All-Share today and the UK’s benchmark bond. (RM)

Mears (MER) 462p

Over the past ten years, Mears (MER) has grown its dividend at a 23% compound annual rate, according to calculations by equity strategy boutique Mirabaud. Although the support services group may offer a fairly-low 2.0% prospective yield, it is the mix of sustained dividend growth and capital appreciation that makes this stock attractive.

The £465 million cap has two core revenue streams. It is the market leader in social housing repair and maintenance. It also provides care services, mainly in a person’s home as this fits with the Government’s desire to shift care out of hospitals and into the community.

Two acquisitions in the past year provide firepower to strengthen both revenue streams. Mears bought troubled rival Morrison last November for £24 million.

Back in spring (24 Apr) Mears completed its swoop for Scottish homecare provider ILS, a deal which took it higher up the acuity care market and thus into higher-margin business. Its work involves trained nurses, an area for which Mears previously lacked a licence to provide such services. A price/earnings ratio of 14.1 times for 2014 does not look excessive given the growth potential. (RM)

SSE £13.28

FTSE 100 constituent SSE (SSE) is our preferred pick among the stodgy utilities but we can only really see it performing well in 2014 if our core scenario of a steady UK economic recovery and further equity market gains come unstuck.

Its fat 91.7p dividend payment equates to a 2014 yield of 6.9% and the leading provider of electricity and gas has a pretty healthy record of dividend increases to its name. The payout has marched higher from 66p in the year to March 2009 to 84.2p in fiscal 2013, even though earnings per share have only edged up from 108p to 118p over the same period. Prospective dividend cover of 1.4 times is healthy enough and the chunky yield would come into its own in the event corporate earnings start to disappoint or deflation becomes the market’s focus rather than inflation. Otherwise, the risk of political interference remains after autumn’s ruckus over tariff hikes and this cloud could hang over the stock all the way through to the 2015 General Election and beyond, depending on whether Ed Miliband and Labour prevail in the ballot or not. (RM)