Irony....Year 1999, President Bill Clinton barely surviving an impeachment vote
find himself in the midst of the worst Global and Domestic Recession in years.....
ANALYSIS-UK Plc outlook darkens amid global gloom
08:46 a.m. Sep 22, 1998 Eastern
By Edna Fernandes
LONDON, Sept 22 (Reuters) - UK Plc is desperately avoiding the ''R'' word, despite the threat of recession looming as hefty world economic storms and faltering domestic demand lead some experts to forecast 1998 earnings may fail to grow at all.
The recent corporate results season was marked by scores of profit warnings, thousands of job losses and cautious outlooks at home and abroad. Companies themselves prefer to speak of a slowdown or downturn, fearful of talking up a recession.
Problems are no longer limited to engineering stocks, struggling to cope with a strong pound and Asia fall-out, analysts said on Tuesday. Gloom has now spread to diverse sectors like banks, food and drink, retailing and chemicals.
The latest casualties include Barclays Bank Plc, which announced 1,100 job cuts at its Barclaycard unit on Tuesday.
Oil giant Royal Dutch/Shell Group last week announced plans to close its London head office, placing 2,000 London jobs at risk, while issuing a profit warning. Beer and leisure company Bass Plc is another British heavyweight to ring the alarm bells.
While some defensive sectors like utilities and drugs remain attractive safe havens as global markets gyrate, UK market strategists warned vulnerable sectors could face fresh share falls as implications for year earnings sink in.
''The top-down outlook for UK earnings this year is zero percent growth,'' said CS First Boston's UK equity strategist Steve Wright, who recently downgraded from five percent.
While strategists, including those at Merrill Lynch, were also predicting no earnings growth this year, Wright said analysts looking at specific companies -- the bottom-up approach -- are still pitching excessively high forecasts which need to come down.
Asked whether further share price falls in exposed sectors was inevitable, Wright said: ''Yes.''
''I have not seen such an uncertain earnings outlook since the last recession (in the early 1990s). We see zero percent, but it would be stupid not to expect to fall into negative territory.''
With turmoil in Russia and Asia, deep-seated worries about Japan specifically and Latin America, the strong pound squeezing exports plus concerns that the powerhouse U.S. economy may face a slowdown amid a political vacuum, once solid sectors have turned soft.
Merrill Lynch's latest economic report, summed things up:
''The profits outlook is deteriorating; firms are pessimistic about chances of pushing through price rises, but are facing higher labour costs...the outlook for manufacturing exports looks worse than on the eve of the last recession.''
Over the last year, the value of oil exploration stocks has fallen by 45 percent, chemicals by 30.5 percent, engineering by 29 percent, leisure and hotels by 22 percent, banks by 19 percent, retailers by 18.5 percent and alcoholic beverages by 15 percent.
Looking at falls in sector value over the last month, financial stocks have fallen by 19.1 percent, oil and exploration by 16 percent, chemicals by 15 percent and engineering by 12 percent.
Manufacturing industry is one sector which has been assaulted on all fronts. First it was hit by the strong pound which cut exports. That problem was exacerbated by Asia and other key emerging markets of Latin America and Russia unravelling. Those had been key growth platforms before.
On top of export woes came a slowdown in domestic orders as demand was affected by higher interest rates, job uncertainty and cheap foreign imports.
The Engineering Employers Federation, which represents many of Britain's biggest companies, reports its latest third quarter review of the industry next month. Its chief economist, Alan Armitage, is said to have described the figures as ''horrendous.''
''All the survey indicators, in terms of domestic demand, order intake and output, have declined significantly...and these results were collated before the recent Russia and market crisis,'' said EEF spokesman Mark Swift. ''It does not take a rocket scientist to work out things are worse now.''
But amid the gloom, equity strategists say some sectors and specific stocks will continue to deliver solid earnings growth. Wright said the market would become more selective in its treatment and reward good companies, instead of punishing all.
Defensive sectors which traditionally survive economic downturns are led by telecoms, gas and electricity firms, tobacco, transport and pharmaceuticals.
Strategists also see modest growth in UK corporate earnings for 1999 on expectation of falling interest rates.
Copyright 1998 Reuters Limited. |
