Lloyds and Shell among 30 global tips for 2016

After some serious brain storming by the smart cookies at RBC Capital, the broker's team of global equity research analysts has compiled its Top 30 Global Ideas for 2016.

"Our strategists and economists predict a healthy backdrop for equity investing in 2016," says RBC. "Steady, but uninspiring economic growth across North America and Europe, reset expectations, and a normalizing rate policy in the United States should support a positive path for equities in the coming year."

Chief US market strategist Jonathan Golub thinks the S&P500 will hit 2,300 by year-end 2016. That's up almost 13% from 2,041 currently, driven by "a higher earnings trajectory and modest multiple rerating".

"The names chosen by our equity analysts for 2016 are all connected by the view that a hyper-growth economic environment is not required for them to generate absolute positive returns in the year ahead."

Of the 30 ideas, just four have their main listing in London.

Lloyds Banking Group

As the country's most widely-held share, Lloyds is of great interest.

"Lloyds' strong capital position is testament to its low risk, high capital generative business model. We believe it will follow other European retail banks and distribute a significant percentage of its earnings such that the dividend becomes the focus for investors and the driver of the share price," writes analyst Claire Kane.

"Lloyds is well positioned to benefit from a growing UK economy such that the balance sheet can return to growth post disposals and non-core asset run-off. The group's predominantly retail funded balance sheet is well positioned to benefit from deposit repricing, particularly since it took on more high cost deposits during the crisis than other UK banks."

Remember, too, that the continued roll-off of expensive wholesale debt, no longer required to support non-core assets, will also benefit the lender. "We expect Lloyds to continue to surprise positively on NIM for the foreseeable future," adds Kane.

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Of course, there are threats, among them regulatory change, a collapse in the UK housing market, rapid rise in domestic interest rates, or further trouble in Europe. However, a normalization of interest rate policies both here and in the US should help as higher rates should improve net interest margin (NIM).

Lloyds shares have performed largely in line with the FTSE All-Share index in 2015, but Kane is sticking with her 'outperform' rating and 95p price target.

Royal Dutch Shell

Royal Dutch Shell is RBC's preferred pick within the integrated oils space for 2016. The shares are down 34% so far in 2015 at 1,466p, a six-year low, but if RBC's Biraj Borkhataria is right, investors could make a killing.

Rating Shell as 'outperform' with one-year price target of 2,025p, the analyst thinks he knows why the oil major has underperformed.

"Restrictions from the UK takeover code have limited Shell from communication in 2015, leaving it in a somewhat static position vs peers who have given detailed accounts on cost reduction and progress to combat the lower oil price environment," writes Borkhataria.

"With Shell's 2015 capex running at around $27 billion, and BG's at $6.5 billion, we expect a material reduction in spending year on year, and well below Shell's current $35 billion guidance for next year. We see Shell's $2 billion synergy target as extremely conservative, and expect more communication in this regard after the deal closes in early 2016."

Dixons Carphone

Despite a name which rekindles memories of the 1980s, electronics retailer Dixons Carphone has outperformed the FTSE All-Share index by 13% since October. The shares are hovering near record highs, but they could be worth even more next year, according to RBC - an extra 14%, or 550p.

"We continue to favour Dixons Carphone for its multi-year growth story and the upside potential from Connected World Services [offers services to businesses]," writes analyst Claire Huff. "We think the UK business will have another strong year in 2016, underpinned by further market share gains, CPW SWAS [store-within-a-store] rollout and margin expansion."

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Following the CWS deal with US telecoms giant Sprint, Huff thinks the company will soon announce a full rollout of 500 new Sprint stores after a successful 15-store trial in Chicago and Miami. It could also shut UK store closures, including the Currys/PC World chain.

"Dixons Carphone currently trades on 15x CY16E PE with an EPS CAGR (CY15-18e) of 13%. We see potential for further margin expansion in FY16 and FY17, led by market share gains in the UK and as the synergy benefits are realised. Our estimates are c2% above consensus."

Ryanair

Up 47% already this year and close to an all-time high, budget airline Ryanair could increase altitude again in 2016, reckons RBC's Damian Brewer. Currently at €14.74, the share price is tipped to hit €16 within the next 12 months.

"Operating costs are lower than at competitors, through staff productivity, a young and proactively maintained fleet, and airport unit costs, which continue (ex FX) to be flat to down. For 2015/16E, the company sees unit costs ex fuel falling ~1%/ passenger," writes Brewer. Debts costs are also lower than peers.

And, while savings from lower fuel costs will be used to cut ticket prices, Brewer thinks Ryanair could close its current fare differential with competitors, "which would make our revenue and profit assumptions too bearish".

Here's the full list of 30 top ideas for 2016:

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.