Specialty finance is one of the most highly geared sectors to a rising or falling market, reflecting...
Specialty finance is one of the most highly geared sectors to a rising or falling market, reflecting the impact asset managers have on the sector, says SchroderSalomonSmithBarney (SSSB).
After examining the FTSE 100 from a beta position, focusing specifically on share price movements, the group's UK and European strategy teams believe a portfolio overweight financials and industrials and underweight defensives will outperform this year.
The research group found that the high beta UK sectors, those expected to outperform in a rising market and fall in a sell-off, include software and media, engineering, chemical, support services and telecoms. It is much easier, says Robert Buckland, strategist at the group, to find UK sectors that show classic low beta characteristics, especially since last September. 'Classic consumer defensives such as tobacco, pharmas, food retailers, food producers and beverages have all shown remarkably similar share price performance characteristics,' he says. 'There are also some less obvious sectors that seem to have shown defensive characteristics recently. Real estate performance probably reflects its exposure to the robust UK economy, while the oil and gas sector shows up as the lowest beta industrial sector.'
Given that consensus expectations are for the UK market to rise this year, the group is suggesting that a portfolio overweight tech, media and telecoms remains the most geared, high-risk play on the market.
However, David Cumming, head of UK equities at Standard Life Investments, feels this area of the market remains unattractive, despite the fact that valuations have come down.
Buckland agrees: 'We recognise that many investors would be uncomfortable building an aggressive overweight in the tech, media and telecoms sector right now.
'Industrials and financials, where valuations and earnings visibility are much more palatable, offer a much less risky option.
'Indeed, we feel uneasy about taking aggressive overweight positions in tech right now. We would prefer the lower risk option offered by financials or industrials.
'They will not deliver top-percentile performance in a rising market but should help investors sleep better at night.'
SSSB prefers higher-beta stocks such as Amvescap, Sage Group, British Airways and BSkyB and is cautious on United Utilities, Safeway, Innogy Holdings, GlaxoSmithKline and Cadbury Schweppes.
While not looking at the speciality finance area, such as asset managers, Standard Life Investments is also positive on financials. Cumming notes that the banking sector has performed well recently, appreciated by investors for its steady dividend flow.
This area of the market has accounted for nearly a quarter of the income generated by the equity market, Cumming adds. 'Recent trading statements have been encouraging and the sector has weathered the downturn with little attrition of shareholder equity. This is because much of the financial pain has been absorbed by the capital markets rather than by the banks themselves. In contrast to previous cycles, bank earnings are more diversified and we remain positive on the sector.'
Financials expected to outperform.
Tech most geared play on rising market.
Banks have weathered market conditions well.
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