Winds of change blow across markets. But investors could lose out if they don't play ball By Friedel Rother FT Investor, 15:37 GMT Mar 8, 2002
LONDON (FT Investor) - Signs of an economic recovery have been building in recent weeks and analysts are backing the emerging trend with more upbeat forecasts for European equity markets in the coming months.
Amid signs that investors remain wary of the market, even the analysts are cautious about the prospects for TMT sectors, putting their belief in more traditional cyclical stocks.
Recovery on the way
"The signs of recovery have been coming through thick and fast," said James Barty of Deutsche Bank. "The chances of a double dip seem to be slipping and those of a synchronised global upswing increasing by the day."
George Hodgson of ABN Amro agreed with that sentiment. "We certainly think there's a recovery on the way. The evidence has pointed strongly in that direction for a while now," he said.
Alex Ions of UBS Warburg was also upbeat, telling FT Investor that he expected a rise of between 10-15 per cent in European equity markets within the next year.
The most recent economic indicator of a turnaround came February's US unemployment report. The jobless rate dropped to a better-than-expected 5.5 per cent from 5.6 per cent, and the non-farm payroll figure posted its first gain since last July. See more on US jobs report
A new view
As well as a change in overall attitudes, brokerages have been adjusting their sector-based strategies.
Gone are the days when technology, media and telecoms stocks were among the most popular. Instead, brokerages are turning their attention to more traditional cyclicals, such as engineering firms, retailers and airlines. See Nick Louth commentary on investment strategy
"We're putting our hopes on industrials and consumer-led cyclicals," said Michael O'Sullivan, a European equity strategist with Commerzbank. He listed Alstom [012019, News, Chart, Research], the French engineering company, defence group Smiths [SMIN, News, Chart, Research] and aerospace firm Rolls-Royce [RR, News, Chart, Research], which on Thursday beat expectations with its 2001 results, as a few names to watch. See more on Rolls-Royce
Michael Hartnett, director of European equity strategy at Merrill Lynch also said he was focusing on largely cyclical stocks in the short-term. He highlighted mining, paper, transportation, auto and leisure stocks as some of his picks in a recent research note.
In addition, Mr Hartnett said oil stocks such as TotalFinaElf [012027, News, Chart, Research] and BP [BP, News, Chart, Research] were good plays, while upgrading the pan-European energy sector as a whole to "very overweight".
"It's a high quality sector with high dividend yields, share buybacks and sound balance sheets," he said.
To buy, or not to buy?
As for European technology and telecoms stocks, however, Mr Hartnett said the sector was far from recovery and told investors to sell on any sign of strength.
"No matter how quickly the economy rebounds, margins in this sector will struggle until a huge reduction in supply takes place."
Meanwhile, Mr O'Sullivan said he was staying away from the "fringe players" in the technology and telecoms sector because they wouldn't recovery quickly. "Most of these companies depend on capital expenditure for their actual revenues and that is always the last part of the recovery to come through," he told FT Investor.
Pace Micro [PIC, News, Chart, Research] was a recent example of the difficulties hitting the sector. Shares in the TV set top box maker fell off a cliff on Tuesday after it revealed that sales and profits would fall sharply because of declining orders from its customers, who include NTL [NLI, News, Chart, Research], Telewest [TWT, News, Chart, Research] and AOL Time Warner [AOL, News, Chart, Research]. See story on Pace Micro
James Barty of Deutsche Bank kept an overweight stance in the tech sector, but reduced his telecoms exposure by removing telecom equipment makers Ericsson [000010865, News, Chart, Research] and Alcatel [013000, News, Chart, Research] in favour of companies such as Siemens [723610, News, Chart, Research] and Misys [MSY, News, Chart, Research].
"We retain our underweight in telecoms where, aside from Vodafone [VOD, News, Chart, Research] and BT [BTA, News, Chart, Research], we struggle to find value," he said.
Looks good to us
The one purely optimistic voice on techs came from Alex Ions, an equity strategist at UBS Warburg. The investment bank recently raised its rating on the IT hardware sector to "overweight" from "neutral".
"The sector, even after a rapid rally in the past week or two, has underperformed by 10 per cent since December," he told FT Investor. "We believe that the sector stands to gain as the economy recovers, especially the semiconductor sub-segment."
Once bitten, twice shy
However, while analysts are picking out their best bets for the year ahead, investors seem to be holding back.
According to Jason Hollands, deputy managing director of investment advisers Bestinvest, many people are shying away from using their ISA allowances this year, and those who are investing are tending towards the traditionally less risky options such as bond funds.
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"They may well be making a mistake because if interest rates start going upwards bonds will feel the pinch," he said.
"People have had two and a half years of steadily eroding valuations, without any sign of a convincing bounce and people have long memories. For investors who lost money to be drawn back to the apple cart, you're going to need some pretty convincing returns and a lot will stay away a long time," he added.
Meanwhile, Mr Hodgson of ABN Amro said many investors were either scared off by talk of a double dip or the concern surrounding balance sheets and accounting issues.
But Mr Hollands urged investors to keep their eyes firmly focused on the future, instead of past performance.
"Investors are doing the opposite thing from what they need to do and not investing. They're taking their eyes off the long-term picture and that can't be a good thing," he said. |
