Spread Betting by Vince Stanzione

In addition to owning brands such as Smirnoff Vodka, Johnnie Walker Whisky, Captain Morgan Rum and Guinness, FTSE 100 group Diageo (LSE: DGE) or (NYSE: DEO) owns a 34 per cent stake in Moët Hennessy.

Over 70 per cent of its operating profits are generated in developed markets (41 per cent in the USA and 32 per cent in Europe), with the balance coming from Latin America, Asia Pacific and Africa. Diageo’s strategy is to convince consumers to trade up to premium brands, and it is well placed to benefit from the momentum in developing markets and newly affluent consumers in China, India and Brazil.

The main risks remain in the developed markets, where unemployment levels are high and consumers could trade down to less expensive brands. Another concern is that governments may increase excise taxes.

One way Diageo has found to sell its premium brands at price-sensitive points is to reduce the bottle size from 1 litre to 700ml. The outcome could be similar to that in the tobacco industry, where consumers lost in the West are more than made up for by smokers in new emerging markets.

At the current £10.80, Diageo offers a yield of around 3.3 per cent and trades on a p/e of 15.3, which is good value for a world-class premium brand. My advice is to buy and hold Diageo for at least the next 12 months.

Bottoms up
Mentioned by me numerous times, FTSE 100 listed SABMiller was part of the old Philip Morris and South African Brewers which merged with Miller. Altria (NYSE: MO) owns 28 per cent of SABMiller and in a recent statement said it had no plans to sell its stake as, besides SAB being a complementary asset to own, a sale would cause tax issues.

Since 1999, SABMiller has proved to be a great investment, with its shares having risen by more than 250 per cent; however, I still see good growth and excellent free cash flow. SAB has a strong African heritage, but its brands are global and include the number one beers in China (Snow), Italy, (Peroni), South Africa (Carling Black label) and Poland (Tyskie) as well as and a host of other beers around the globe in number one or two positions.

SAB has a good spread of brands in premium, mainstream and affordable markets, making the company less susceptible to a weaker economy. The only slight negative is in the USA, a highly competitive market, but this weakness is more than offset from growth potential in China and Africa. The upside from the World Cup being hosted in South Africa this year should also help local SAB sales.

At the current £18.50 level, the shares are on a p/e of 20 with a yield of 2 per cent, so some of the growth is already priced in. Nevertheless, I argue that the long-term SAB trend remains upward.

Seasonality still favours the bulls
While world stock markets are off to a calmer start this year, seasonal factors still favour some more short-term gains in the indices as we run up to the end of April. At that time, it would then be worth looking to reduce risk as we move into the traditionally weaker market period between May and October.

The big moves so far this year have been in the currency market and I still believe that the US dollar will continue to see short-term strength, with the pound being the weakest of the major currencies.

One factor that may have been missed is how many UK companies could be wide open to takeover bids, particularly from Australian, Canadian or Norwegian companies. For example, if you’re based in Canada, which has a strong currency, your money in the UK will go around 30 per cent further than it did a few years ago.

So we could see some good trading opportunities from potential takeover targets in the coming months.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds. For more details, visit www.fintrader.net