Consumer cyclicals and industrials will be the most likely sectors to lead the US out of its slump, ...
Consumer cyclicals and industrials will be the most likely sectors to lead the US out of its slump, according to Alex Ingham, fund manager at Aberdeen Asset Management.
But technology, one of the areas that usually does well following tough times, is unlikely to be leading the charge this time round, he says.
'Technology has had a separate issue, with massive over-capacity and oversupply,' he says. 'In addition, because of the huge amounts spent on IT between 1997 and 2000, IT spending is not a priority for many companies. Technology is a discretionary cost and companies have been cutting back on capital expenditure.'
Demand for IT has not fallen off a cliff, so any recovery will be more muted in comparison, he says, noting the downturn has reduced expected growth. He believes it is unlikely that there will a further boom because there will be no pent-up demand to fuel it.
In this environment, industrials are likely to do well, he believes, especially as the industrial sector tends to respond well to a fall in interest rates.
'We're overweight industrials at the moment, although we're unsure of when exactly the rebound will come,' says Ingham. 'We're keen on auto parts suppliers and machinery.'
Steve Arnold, fund manager at Threadneedle, is also confident about the prospects for industrials and consumer cyclicals.
'In the cyclicals sector, hotels could be a signifier that a recovery has begun,' he says. 'Business is down at the moment because of a reduction on business travel, one of the industry's main drivers. There has also been very little in the way of investment or an increase in the numbers of rooms available. When business travel starts to increase again, prices will rise. As costs tend to be fixed, hotels will do well.'
Further Aberdeen Asset Management is not as keen on consumer cyclicals, preferring to remain underweight, despite believing they will be in the vanguard of the recovery. Valuations are too high, and are at a level that would be expected after a rally, according to the group.
It is also a sector that depends heavily on consumers maintaining their current spending levels despite gloomy economic forcasts, says Ingham.
Arnold agrees that industrials will do well. Over the past 10 years, the US industrial sector experienced relatively slow stable growth, he explains. As a result many companies focused on cutting costs, not increasing capacity and are now in excellent shape, he says.
However, Arnold says, it could be the media that blazes the recovery trail first.
The profitability of companies such as AOL-Time Warner, Viacom and Disney is dependant on strong advertising revenues. If revenues pick up, then Viacom especially will do well.
Arnold says: 'I like Disney in this sector. It's a broad conglomerate that has underperformed recently, but it is stable. In some quarters it has been viewed as a cyclical but it is trading at a big discount to something like AOL. There has also been a change in management focus towards increased returns on investor capital.'
• Consumer cyclicals first to show recovery.
• Industrials in good shape.
• Media will respond to rise in ad revenue.
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