Source : FT.COM
Investors boldly return to battered sectors in equities
By Ellen Kelleher
Published: May 9 2008 19:00 | Last updated: May 9 2008 19:00
Investors appear to be regaining their appetites and buying equities again, believing that the darkest days of the market downturn are over. The falling price of gold, a short-lived rally in US government bond yields and news that US job losses were fewer than expected, acted as the prompts for their optimism.
And, this week, as the FTSE 100 rose to a four-month high and Wall Street reported mixed results, US Treasury secretary Hank Paulson, went as far as to say the worst of the credit crisis had passed.
“In terms of the capital markets, I believe we are closer to the end than the beginning,” he said.
Even the Bank of England monetary policy committee decision to keep interest rates at 5 per cent suggested some confidence in the UK economy.
But some City fund managers remain pessimistic. This week’s news of a quarterly loss of $7.8bn by American International Group, the world’s largest insurer, dealt another blow to their confidence.
“We have a long way to go. There’s still a lot of bad news to come,” says Robin Geffen, chief executive of Neptune.
The round of writedowns by US, UK and European banks and companies is not finished, Geffen argues, and the slowdown in the housing market on both sides of the Atlantic is likely to continue.
Nick Wells, marketing director at Artemis, is in agreement, claiming that while the consensus at his group is that markets are calmer, it is “always dangerous to forecast”.
Ian McCallum, global fund manager with Bedlam, is of the same view. In his opinion, a downturn accompanied by inflation is a “long, slow grind” as companies’ price-to-earnings ratios tend to erode over a longer period of time.
“This is a temporary blip,” he says. “I’m not surprised we bounced back, but I still think most companies’ growth will grind lower and so will their earnings.”
So, in a mixed market, where should investors turn?
Ian Lance, Schroders’ UK value fund manager, suggests buying beaten-down retailers and leisure groups, as he predicts shares will rise in the coming months. Depressed cyclical stocks he has bought range from DSG, the electronics retailer that owns Dixons, and the clothing store Next, which has seen a 50 per cent fall in its share price in the last 12 months (see page 13 for a more short-term view). He also suggests the Daily Mail and General Trust.
Fertiliser groups and Hong Kong and Tokyo-based property companies are worth a look, too, claims Bedlam’s McCallum.
“In Hong Kong, it’s mad not to be buying property, the mortgage costs are lower than properties’ investment yields,” says McCallum.
Two other sectors Schroders’ Lance thinks deserve a look are telecoms and pharmaceuticals. “GlaxoSmithKline and AstraZeneca have been beaten down and look attractive,” he says.
“Telecoms offer another example of stocks that have performed worse than the market.”
High inflation also allows certain industrial companies and commodities-linked groups to maintain pricing power, Bedlam’s McCallum points out.
Alstom and Siemens are both companies that have been able to raise prices because of strong demand, while maintaining a fixed cost base. “They have been able to expand margins and pass on cost pressures pretty easily,” he says.
Oil and oil services companies, which are seeing record cash flows thanks to the rising oil price, as well as groups likely to profit from the sustained boom in the price of commodities are touted by Jeremy Tighe, manager of the Foreign & Colonial Investment trusts, and by Threadneedle manager Alex Lyle.
The combined effects of the rising oil price and a find off the coast of Brazil have boosted the performance of BG and Petróleo Brasileiro, two of Lyle’s key holdings.
But apart from the contrarian Lance of Schroders, most managers still shy away from companies dependent on consumers for profits, as they think the downturn is likely to curb spending for some time.
Another subject of debate in the City is when bombed-out sectors such as housebuilders and financials should be considered.
While F&C’s Tighe is avoiding most financial bets for now, he is a fan of some rights issues, opting to participate in Royal Bank of Scotland’s £12bn offering.
However, he predicts investors may grow weary if more companies follow suit.
“On the right terms, they are very attractive for institutional investors,” he says. “The problem is there may soon be so many of them that people will become more discriminating.”
Most managers still favour investing in emerging markets over developed ones as Brazil, Russia and other developing countries are still seeing better growth at discounted prices.
In the last three years, MSCI’s emerging markets index has outpaced the FTSE 100 dramatically, with a return of 120 per cent, compared with a 31 per cent rise in the FTSE 100.
Copyright The Financial Times Limited 2008
