The two-speed market within the All-Share is becoming ever more apparent as the tech and telecom sto...
The two-speed market within the All-Share is becoming ever more apparent as the tech and telecom stocks continue to soar ahead.
In the year to date the All-Share is up some 15.21% with much of the performance coming from the telecoms sector, up 45.89%. Telecoms now make up 13.49% of the All-Share, second only to the banking stocks.
While mining, up 86.86%, and electricals, up 57.45%, have both outperformed telecoms, neither have such impressive weightings at 2.13% and 1.75% respectively.
Bill Mott, head of UK equities at Credit Suisse Asset Management, says: "At the moment the market has a very narrow focus, which can be dangerous. We have two markets forming, one that is very hot and doing very well and another that is very cold."
Neil Birrell fund manger with Framlington believes many of the "cold" sectors in the market are in limbo waiting for merger and acquisition news before reacting either up or down.
He says: "Areas like banking are in a state of de-stabilisation waiting for the results of the NatWest takeover bid, and then there is pharmaceuticals where all the talk is about Glaxo-Welcome and SmithKline Beecham merging. The market is waiting for news on both sectors before making a move."
Julie Dean, fund manager with HSBC agrees that times are certainly tough for those companies whose top line growth potential is dependant on retail price inflation.
She says: "There has been a severe underperformance by both consumer cyclical and consumer defensive sectors - general retailers, restaurants, pubs and brewers and food producers.
"Here the positive impact of further consumer spending has been offset by the general problem of chronic overcapacity combined with deleterious effect of deflation.
"Return on sales for many companies in these sectors also remains high by international standards. In a highly competitive, low growth, low inflation environment, the downward pressure on profitability will persist. These sectors are likely to derate further."
Mott too believes there are plenty of stocks underperforming because they have not yet come to terms with the economic environment, he highlights Sainsburys, Boots, Marks & Spencer as examples. Even so he foresees a more positive long term future for these underperforming companies.
He adds: "At the moment it is difficult to see good value in the hot areas of the market but it is all a game of momentum.
"A number of retailers are currently oversold and the value is there. The best bet is not to look at individual retailers but to buy a basket of the better companies."
Birrell sees the retail struggle going on for some time, as profits continue to fall despite increasing sales, due to the extremely low margins.
He adds: "There are some areas that are doing well - like the oil sector, where BP and Shell have impressed.
"The cyclicals, such as home construction, have also done well rallying earlier than expected on the back of indications of when interest rates will peak."
Birrell is predicting interest rates will peak at 6%, in the middle of next year.
Both Birrell and Mott agree that those fund managers who have relied on buying blue chips have struggled to make gains in the current market conditions.
Mott thinks the blue chips are now offering value and the market will recognise this sooner rather than later. Birrell is more tempted by the telecoms, whose profits and popularity are continuing to grow.
Birrell says: "Telecoms and technology stocks have a massive long-term value. We foresee a massive end of year rush of fund managers tidying up their portfolios to make sure they have enough stock for investors."
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