An increase in global growth next year will be a boon for cyclical stocks and these are finding favo...
An increase in global growth next year will be a boon for cyclical stocks and these are finding favour with portfolio managers.
Kenneth Warnock, UK fund manager at Johnson Fry, is overweight in selected stocks including British Aerospace, Bodycote International and Hanson. He says these companies with their strong market positions are set to do well next year. The FTSE All Share Engineer & Machinery index is up 14.78% in the 12 months to 6 December compared with a 22.43% rise in the FTSE All Share in the 12 months to 7 December.
The house building sector, another typically cyclical sector, is also slightly underperforming the market, with the FTSE All Share Construction and Building Material index up 21.54% in the 12 months to 6 December.
Warnock says: "We have never been a big fan of deep cyclicals such as steel companies or a lot of the building stocks. There are a few people saying that cyclicals benefit from a pickup in inflation and global growth in the short term.
"For example, with mining stocks, as growth goes up that is often reflected in the prices of the minerals and these type of stocks should do reasonably well. However, you cannot look at cyclical stocks without looking at growth stocks. People have to be moving money out of the high growth technology stocks and into cyclical stocks for them to rise.
"We have been reducing our weightings in the higher rated growth stocks such as as Psion, Marconi and Dixons, and moving into the more cyclical areas. We are looking at the more high quality end."
Warnock says that one important factor is to get exposure to the expected acceleration of growth in continental Europe during 2000. He favours metallic heat treatment company Bodycote International, which he says has the greatestexposure to continental Europe among UK engineering stocks. The stock is on a P/E ratio of around 11 times and Warnock believes it should be trading at 15 times. Bodycote International saw its shares fall by 0.32% in the 12 months to 7 December. Warnock also favours British Aerospace, which is on a P/E ratio of 11 times, and adds that the stock has a solid defence business and analysts expect the company to deliver earnings growth of around 15% next year. British Aerospace shares fell by 19.77% in the 12 months to 7 December.
Jim Strang, UK fund manager at Edinburgh Fund Managers, is also favouring certain cyclical stocks including house builders. Strang holds engineering stock TI Group which manufactures value-added high technology such as landing gear for air buses and cites it as an example of a high quality cyclical. TI Group's shares were up 39.68% in the period between 7 December 1998 and 7 December 1999.
Strang also favours Wilson Bowden which builds upmarket housing in geographically diverse areas. He prefers this stock to Berkeley Group which is more exposed to the London property market and could be vulnerable to any correction in the London house price boom. Wilson Bowden shares posted a rise of 31.06% in the 12 months to 7 December with Berkeley Group shares up 55.9%.
Warnock also says that, with cyclical stock companies experiencing some volatility in their underlying businesses, he tends to favour stocks which have diversity in the geographical regions they are exposed to. He favours building materials group Hanson, which has recently agreed to buy Australian concrete group Pioneer, giving it exposure to the Far East and Australasian region which is expected to see accelerating growth next year. Hanson is on a P/E ratio of 11.5 times but analysts expect to see 15% annual earnings growth over the next three years.
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