UK earnings improving By Jenne Mannion Stockbroker Charles Stanley predicts UK consumer cyclicals w...
UK earnings improving
By Jenne Mannion
Stockbroker Charles Stanley predicts UK consumer cyclicals will outperform as economic growth prospects improve.
So far this year the sector has underperformed but Omar Sheikh, head of research with the group, said a change was signalled with consensus UK GDP expectations for 2000 rising to 2.3% from 2.1% in January.
According to Charles Stanley, the leisure, entertainment and hotels sector is up 14% from January levels, while the restaurants, breweries and pubs sector has risen 10%. The general retailers sector is up 8% and transport is 4% higher.
Sheikh said: "We think there is every reason to expect earnings forecasts to begin to improve in the second half. As soon as these start to appear we think share prices will quickly follow."
He is less hopeful of a recovery in the food producers, electricity, water and pharmaceuticals sectors which have fallen by 12%, 11%, 10% and 8% respectively since the start of 1999.
Sheikh continued: "As long as the economic data continues to point to a gentle expansion, we see little reason for the bear case for these sectors to change. There are simply better stories available elsewhere in the market."
Charles Stanley believes there are plenty of areas within the UK market of interest to investors in the second half of 1999 and it expects merger and acquisition activity in a number of sectors.
Sheikh said: "Retailers have the attention of the largest US retailing group Wal-Mart to worry about. Its agreed bid for Asda makes an intensification of competitive pressures in the industry look much more likely, along with a price war. Although this will hurt margins in the sectors in the short term it will ensure that ultimately larger, leaner groups will have to emerge."
Also likely to be in the spotlight for takeover speculation in the second half of 1999 are life assurance and insurance companies, he said. A major catalyst in this trend is Scottish Widows' recent decision to give up its independence believing the future belongs to larger, better capitalised groups.
Sheikh said large European composite insurers continue to seek scale to take full advantage of the single currency and the UK's relatively fragmented market will look attractive to them.
Banks are going through a similar period of restructuring in the bid to gain a global scale. So far this year the mining stocks have been some of the strongest performers in the market, helped by the turn around in commodity prices.
During the first four months of 1999, the FTSE 100 increased by 18% as a result of optimism in the economy and ongoing corporate activity although it then gave up some 3% in response to the US Federal Reserve's announcement in mid-May that it had adopted a tightening bias in its setting of interest rates.
According to Charles Stanley, renewed confidence in mining and other commodities was being driven by faster-than-anticipated recovery in some Far Eastern economies. The Goldman Sachs commodity index has risen by 22% since
it bottomed out at the end of February.
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