2016 has kicked-off with concerns surrounding the future of the Chinese economy. While these are valid and the world’s second-largest economy is posting a slower GDP growth rate than a couple of years ago, it still offers huge long term potential.
That’s because the number of middle income earners in China is forecast to rise by over 300m between 2014 and 2030 which, for consumer goods companies such as Diageo (LSE: DGE), offers vast profitability growth potential.
Despite this, Diageo’s share price is being hurt in the short run by a slower growth rate in China and the wider Asian economy. The company’s valuation is the same as it was at the start of 2013 and, with its bottom line having fallen by 7% in each of the last two years, its reputation as a defensive growth stock has been called into question.
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Looking ahead, Diageo is forecast to record a rather lacklustre 1% rise in net profit in the current financial year. However, its longer term outlook is much more positive given the aforementioned potential for growing demand across China and the rest of Asia, with Diageo having cemented its position in the region via the introduction of localised products and also vast spend on marketing its premium brands. As such, and while 2016 may not deliver stunning share price performance, Diageo appears to be a sound buy for the long run.
Also offering excellent long term growth potential is the UK house building sector. That’s at least partly because of the low valuations on offer, with prime property builder Berkeley (LSE: BKG) currently trading on a price to earnings (P/E) ratio of 14.2. That indicates excellent value for money since Berkeley is forecast to increase its earnings by 51% in the next financial year, which puts it on a forward P/E ratio of only 9.4.
Clearly, UK interest rate rises may dampen demand for prime UK property – especially from foreign investors if sterling appreciates. However, with the Bank of England adamant that rate rises will be slow, Berkeley’s sales prospects appear to be strong and its risk/reward ratio remains highly enticing.
Meanwhile, insurance and recovery specialist group AA (LSE: AA) today announced a joint venture with roadside assistance clubs in Europe and Intelematics to provide connected-car software for its customers. This will help AA to respond more effectively to recovery callouts and could improve safety and security for its customers.
With shares in AA having risen by 11% in the last month, investor sentiment appears to be picking up after a disappointing period. The stock now trades on a P/E ratio of 14.6 and, with AA being forecast to increase earnings by 15% next year, it appears to offer good value for money at the present time.
Moreover, with dividends due to rise by over 11% next year and yet still due to be covered 2.4 times by profit, AA’s yield of 3.3% could become much more appealing in the long run. As such, now appears to be an opportune moment to buy a slice of it.
