As investors face volatile markets and geopolitical tensions, an investment manager highlights his firm's top stock pick this month as well as the outlook for 2024. 

Richard Farmiloe (pictured), lead fund manager of the Sorbus Vector Fund at Sorbus Partners, a private investment office, made an investment case this week for two undervalued British companies with global reach, Diageo and Burberry. 

“Whilst the majority of our holdings are UK centric, many are in their own right true global players,” Farmiloe told WealthBriefing.

However, in his view, the markets completely overreacted to the news issued by Diageo and Burberry (whose shares fell 13 per cent and 11 per cent respectively).

London-headquartered Diageo, a drinks group, issued a profits warning for the fiscal year 2024. The company is experiencing a decline of 20 per cent in net sales in their Latin America and the Caribbean operations (representing some 11 per cent of their global sales), due to weakening economic conditions. However, Farmiloe believes that this is a short-term issue. “Diageo is still gaining market share within the region and the other four regions in which the company operates are growing. Looking beyond 2024, Diageo is expecting organic net sales growth of between 5 per cent and 7 per cent over the medium term,” he said. It is important to note that this trend of growth rate is above their growth rate pre-Covid. 

Likewise, Burberry, a luxury British fashion house, is experiencing a slowdown in the luxury goods sector whilst having to deal with the impact of inflation on operating costs. “As a result, Burberry is now guiding that operating profit will be towards the bottom of its previously-stated range of £552 million ($691 million) – £668 million and operating margins have declined for the first six months of the year,” Farmiloe said.

Looking through the short-term difficulties, Farmiloe believes that Burberry is continuing to make progress with its objectives, making a number of investments over the period, and it retains its brand identity. “We have experienced periods of volatility in Burberry’s share price before and we are comfortable with riding out the current difficulties, whilst benefiting from its attractive dividend and share buy backs (ÂŁ400 million in 2023),” he continued.

In both cases, Farmiloe believes that Diageo and Burberry remain quality businesses, with strong brand identities. The share price falls reflect short-term disappointment, but he thinks the investment case for both companies remains strong.

Outlook 2024
“The sharp price falls are a reflection of how sensitive markets are to bad news at the moment,” Farmiloe said. “The overall market backdrop for 2024 looks set to be a challenging year for investors. The risks of a global recession are still real and significant, despite how economies have held up in 2023,” he added. 

“Our analysis suggests that this has not been adequately understood by investors. The bottom of a bear market is characterised by stock prices remaining flat or even rising on the back of bad news,” he continued. “This is an indicator that negativity and bad news is already factored into share prices. We are not at this point yet. Poor trading news (which is increasing in frequency) is denting share prices which shows that markets are not correctly pricing the prevailing economic condition,” Farmiloe concluded.