City legend's share tips for 2016

Highly-respected veteran City commentator David Buik tells Interactive Investor which shares and trends investors should keep an eye on in 2016.

What are your favourite blue-chip shares and why?

On a personal basis I'm not allowed to make stock recommendations, but I can tell you what the various people at Panmure Gordon recommend.

There is a strong liking for technology and there are three stocks we like a lot. One is Microfocus and the other is Midatech, which is again partly technology and partly pharmaceutical. It's done very well and we have huge aspirations for it. The other is Fusionex International.

We tend to be rather cautious and are great lovers of Imperial Tobacco. When there is trouble about, Imperial will never let you down. We also have extreme respect for Ryanair;despite the threat of terrorism, people still want to go away on short-term trips.

Apart from that, we like the insurance sector: Prudential and Aviva have been on a recovery path and I think they will continue to do so.

Are there any small-cap shares investors should keep any eye on?

Small-cap shares perhaps not, but there are some smaller ones on the FTSE 250 that we like. Informa and RPC Group have done really well and have great plans for the future. We have more than a passing interest as brokers for them.

Where will the FTSE 100 finish next year?

Assuming we are going to finish between 6,350 and 6,500 at the end of 2015, were we to see 6,500 by the end of 2016 I'd be extremely pleased.

Will equities avoid a major crash in 2016?

Will there be a major market correction in 2016?

I was expecting one in 2015, but we didn't really get it. We got a 10-12% correction in August for various reasons: basically the treat of higher interest rates, China looking like it was going to fall off a cliff in terms of growth, and damaged emerging markets.

But we have seen the situation redress itself. The United States is either flat or slightly above the Plimsoll line in terms of achievement this year and the DAX in Germany is up about 12% as we speak (1 December). The FTSE is down 5%, so we have seen it underperform. Why? Because oil, banking and mining stocks are very important. All three have performed extremely badly in 2015.

If China's show is really back on the road, then I can see equity markets going forward. Apart from that I am extremely cautious because I think they are fully-valued, if not over-valued.

With no inflation to speak of, margins have narrowed and we saw big share buy-backs in 2015 as a way to deliver shareholder value. We've also seen high M&A activity because companies don't know where they'll get profits from without greater market penetration. We've seen it in the drug world, in media and in telecoms. We are going to see it all over the world as it is unavoidable.

You can't keep going back to shareholders saying you want to do a share buy-back to deliver value and we can't see these enormous M&A activities going on forever. Dividends have also been falling gradually for two-three years, which is a worrying state of disrepair and I caution people.

In regards to the FTSE 100, if China's show is back on the road, we will see a recovery in mining stocks but that is a big "if". I don't see a recovery in oil prices, but I also don't see them falling much lower.

So, where do we look? Stimulus packages from the European Central Bank for Germany and France will see some of their drugs stocks, banks - which are currently at trash level - food and retail might do very well. Many like the idea of a recovery in the DAX and the CAC, because the value of the euro has dropped.

You have been warned. Everybody thinks Europe is recovering as its growth rate is above 1.5%. I have my doubts. I think in the case of Spain and Italy there has been an improvement, which we have seen in the drop in yields from their bonds, but in regards to the mature levels in Germany and France and with Germany not being such good friends with Russia now, prenez garde!

Market-moving themes for stocks in 2016

I think there are four themes for equity markets that people need to watch. The first are geopolitical issues, not only the appalling activity in Syria and the damage it is doing to Europe, but also the relationship the West has with President Putin is at an all-time low.

The question is whether we can have a negotiation to help rather than Putin using the situation as a maverick to make sure he corners the oil activity in Iran, Iraq and Syria for his own benefit. Oil around $40 a barrel isn't good for the Russian economy.

Conversely, oil prices aren't going to go up and we need to look at what OPEC is going to do, although they seem stubborn. It won't want to cut back on production, it suits them to try and blow the United States away in terms of oversupply.

Also, interest rates. We have been teased by the United States for some time [Janet Yellen rose interests by 25 basis points at the beginning of December].

Then, I think it is extremely important we look at China. Has the rot stopped? Is there a real recovery? Should we be looking for them to make a serious contribution beyond what they have done already? If they have done so, we have some reason to be optimistic in terms of imports and exports. In my opinion, they are the key to the kingdom in 2016.

Which sectors could make the headlines?

We are deeply and irrevocably in love with technology for the simple reason that everything the world does now involves technology. You've either got the existing companies that have done extremely well, whether it's Amazon, Intel, IBM, Microsoft or Apple - it doesn't matter.

Therefore, for any add-on value they will be buying and any smaller company will be under the microscope. Outside of that we are very keen on media and telecoms because the one-stop shop is very important. BT has already set down its stall in buying EE for £12.5 billion. It's also got broadband and BT Sport.

Vodafone, where are you? There was no deal with Liberty Global because there wasn't enough common ground between the pair, but they can't just sit on the $45 million cash pile they got for Verizon and, even though mobile use is rising, margins are narrowing and companies have to find other things to do. We like ITV and Sky as well.

Apart from that, it has to be pharmaceuticals. We've seen huge talks going on, initially between Pfizer and AstraZeneca, which came to nothing a year ago. Astra rejected a £55 a share offer, which struck me as insane. We've also had the AbbVie bid for Shire, which didn't happen.

Now we have the consummation of Pfizer and Allergan in a huge $160 billion dollar deal. There will be more for the simple reason that we need pipelines.  So, the drug sector is one to keep an eye on.

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.