Buxton recommends RBS

Richard Buxton, the head of UK equities at Schroders, recommends buying shares in Royal Bank of Scotland (RBS) despite the well-publicised troubles of the 70% state-owned bank.

“While no one is likely to have missed the extraordinary problems that have befallen this name and the global banking sector, we believe there is some significant value in RBS,” says Buxton.

Highlighting the government’s reluctance to fully nationalise banks, Buxton says RBS will rebuild its strength with “fewer players in the industry and significant government assistance” and labels it a value stock.

As a similar cyclical stock with medium-to long-term value, he also recommends British Airways, which was the third largest holding in his UK Alpha Plus fund at the end of 2008, with a 3% weighting.

“As the recession imposes a ‘survival of the fittest’ on the industry, solid, stable names such as BA should emerge amongst the winners,” says Buxton, who also notes its likely merger with Iberia.

He predicts “sentiment-driven volatility” in the markets for the next few months, but says there should not be a long-term drop below current levels. “Investors will soon start to come around to the idea that the recession is not going to be any worse than is already factored in,” he says.

In the technology space, he likes the firms Logica and Misys because Logica has “good order and revenue growth”, while Misys offers a “strongly performing healthcare division” and its financial services division is undervalued, he says.

Finally, he identifies Thomson Reuters as a stock that is undervalued because of Reuters’ poor performance during the last recession, before Thomson and Reuters merged. Since then, he believes, its products have improved, while Thomson’s information services cover “far more defensive business areas”.

In the year to March 4, the Schroders UK Alpha Plus fund underperformed its sector, losing 40.11% of its value against 35.91% for its UK All Companies Retail sector, according to Morningstar.

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