The manufacturing sector is starting to look more attractive on a valuation basis but concerns remai...
The manufacturing sector is starting to look more attractive on a valuation basis but concerns remain over the macro outlook.
While hopes of a second half recovery are all but a distant memory as profits warnings abound, fears regarding the likely war in Iraq are helping to drive prices down.
Chris Tracey, investment director at JP Morgan Fleming, says although economic data is not as bad as feared, with jobless claims, home sales and durable goods orders reports showing some signs of improvement, consumer confidence fell to a 10-month low in September, signalling economic weakness ahead. He notes that when the Federal Reserve met last month, keeping rates on hold at 1.75% as had been generally expected, divisions in the committee were apparent. Two board members publicly voted for a rate cut, a move against official policy almost unprecedented for recent times, which also increases the likelihood of a rate cut at the next meeting on 24 November.
The S&P 500 Industrial Conglomerates index has underperformed the broader S&P 500 over the year to 2 October owing largely to problems surrounding two of its four constituents, Tyco and General Electric. The S&P 500 Industrial Conglomerates index is off 40.251% compared to a 26.145% fall in the S&P 500.
Last month's announcement from General Electric, which lowered its earnings forecasts, helped knock a couple more billion off its market cap.
General Electric has now posted growth of -34.63% over the year to date and, given its size, some 3% of the S&P 500, few fund managers have the mandate to zero weight the stock. Gary McAleese, investment manager on the US desk at Edinburgh Fund Managers, says the General Electric share price has now fallen to less than half of its $60 peak. The mega-cap has made a series of acquisitions over the last few years, a number at the top of the market, leading the group into many different areas.
'The company is also geared into the aerospace market, which has not yet recovered from the effects of 11 September and probably won't for at least another six months. It also has a presence in some short cycle businesses, such as plastics, which have been adversely affected by the market conditions,' he says.
Given the emerging consensus from analysts, who are keen to downgrade the stock, now could be a good time to buy, taking their views as a lagging indicator. McAleese adds: 'These kind of stocks are typically the kind you buy when they are flat on their backs and analysts' downgrades are a good sign they are closer to reaching a bottom.'
He says on these valuations, industrial stocks are now looking more attractive but with the potential for further market downside from international events, he is cautiously optimistic.
McAleese says: 'The war on Iraq could act as a catalytic event that takes these stocks to even more interesting levels, especially if you think it will be a short, sharp shock. We will probably looking to add some light industrials, such as basic materials names, in the fourth quarter. They are all driven by the same factors and have been hit quite badly with the economic recovery not going as planned.'
Economic data better than expected.
Valuations reaching more attractive levels.
Potential for rate cut next month.
Consumer confidence ebbing.
Profits warnings still rife.
General Electric and Tyco underperforming.
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