Financials may have outshone defensives in 2012, particularly in the UK, but Charles Stanley’s investment team is preparing for a 2013 which will offer little respite from global headwinds.

It warns markets remain at risk of paralysis as high debt levels hamper policy action, and as such it has selected a range of UK companies it expects to thrive in a low growth, low inflation environment.

Below are the ten FTSE 100 stocks Charles Stanley is backing to outperform peers in the UK’s largest index.

1. ARM Holdings

Current price: 792p

Charles Stanley concedes ARM is undeniably expensive if investors focus on short-term earnings – its share price has rocketed by around 8% since the 14 December alone – but if investors look further out, it remains very attractive, the firm says.

“The royalty model leads to a growing and annuity-like earnings stream over the next one to two decades; it is gaining market share through the outperformance of its semiconductor clients, and its royalty rate for many products is increasing,” the team at Charles Stanley said.

2. BG Group

Current price: £10.27

Fresh from “shocking” investors in 2012 with flat guidance for this year on production, Charles Stanley is nonetheless tipping the oil and gas giant in 2012 after a sharp fall in its share price.

“There is plenty of long-term potential from its assets, especially in Brazil,” said the team.

3. British Land

Current price: 574p

One of the UK’s largest REITs, British Land had a very strong run in 2012, but Charles Stanley’s team expects the stock to give even more back to investors this year.

“The diversified portfolio of prime retail (60% of portfolio) and central London offices (c.40% on completion of current developments) remains well placed to continue to deliver material outperformance against the wider property market in 2013,” Charles Stanley said.

“The stock is trading at a 7% discount to FY13 NAV, while offering an attractive earnings yield of 5.4% and dividend yield of 4.7%.”

4.BSkyB

Current price: 785p

Another company which fared well in 2013, BSkyB has the potential to outperform again this year if it can get more customers to take on its complete package, according to Charles Stanley.

“Only 32% of customers take the complete TV, broadband and telephony pakage,” the team said. “We forecast further solid growth in earnings and dividends over the medium term. The valuation seems undemanding.”

5. BT

Current price: 241.5p

One of Charles Stanley’s main defensive opportunities, the team expects it to benefit from continued operational improvements, despite some well-flagged issues.

“Group revenues are unlikely to increase significantly until the recession ends and, at around the same time, the Global Services division is fully turned round. However, in the meantime management continues to achieve operating efficiencies quarter after quarter and remains focused on cashflow, on delivering in line with guidance, and on transparency,” they said.

“With strong management the company is able to exploit the scale economies that characterise fixed line telecoms. The ruling of the Pensions Regulator remains a potential concern but should not be too material.”

This article continues…

6. Centrica

Current price: 334.5p

Centrica, which made investors around 20% last year, is an opportunity for income investors in particular this year, according to Charles Stanley.

“Increased vertical integration and cost savings should enable continued earnings growth despite the tough operating backdrop (weak consumer demand and low margins at gas-fired power generation),” its team said.

“Strong cashflow and a healthy balance sheet support capital deployment (organic investment and acquisitions) and real growth in the dividend. There is speculation CNA might ramp up investment in North America or return excess cash to shareholders via a share buyback should it decide not to pursue new nuclear build.”

7. GlaxoSmithKline

Current price: £13.76

Last year the country’s largest pharmaceutical business was one of the main losers on the FTSE 100, its shares down around 7% after a weak set of Q3 numbers.

However, Charles Stanley says its “robust” pipeline of drugs due for further testing in 2013, and a dividend of 5.7%, leave the company looking attractive.

8. Pearson

Current price: £12.11

Pearson – the world’s largest educational publisher and owner of the FT Group – lost ground last year despite its defensive attributes.

However, Charles Stanley argues the sector it operates in remains a structural growth industry, and as such it should benefit.

“We anticipate further steady growth in earnings and dividends over the medium term,” the team added.

9. Rexam

Current price: 450p

Packaging giant Rexam saw shares climb around 30% in 2012 as demand for defensive companies with predictable earnings flourished.

Highly focused on shareholder returns, and with a sale of part of its business due this year, Charles Stanley is optimistic it can deliver further returns in 2013.

“In 2013 it is targeting a 15% ROCE and after completing the disposal of Personal Care, we expect £370m to be returned to shareholders,” the team said.

“The beverage can business is recovering market share in the US and overall is benefitting from growth in speciality cans and from emerging markets. We anticipate a positive re-rating for the share.”

10. Weir Group

Current price: £19.43

Industrial engineer Weir Group was another laggard in 2012, falling around 9%.

Lower cap-ex from the miners and commodities firms it provides services to have impacted its share price, but this year that is set to change, according to Charles Stanley.

“With aftermarket demand expected to improve and meaningful cap-ex spending expected to resume in 2013, we take a positive view on the group’s prospects,” the team said.