Patrick Evershed, manager of the Rathbones Special Situations fund, argues that, going forward, it i...
Patrick Evershed, manager of the Rathbones Special Situations fund, argues that, going forward, it is difficult to see which sectors within industrial cyclicals are undervalued.
He says: 'Things in the main look more in line at the moment. At the end of 1999 and beginning of 2000, housebuilders looked cheap, retailers looked cheap, property looked cheap and technology was massively overvalued. Now, it is more difficult to find things that are out of line.'
Evershed says that over the past 12 to 18 months, housebuilders, motor traders and small production companies have done well. But, he says, the problem going forward is the uncertainty over whether or not sterling will fall to a sensible level to revive the manufacturing sector.
In the short-term, he believes, smaller oil companies like Paladim, which is increasing production rapidly, do look good. But, he says, it is becoming more difficult to find sectors that are as promising.
Evershed says he will continue to invest in housebuilders but notes it is important to avoid those with a high exposure to the South East because of the high house prices in the region. He recommends housebuilders with a bigger exposure to the North or public sector building as the Government will be spending more money.
Mark Inzani, director of pan-European equities at Friends Ivory & Sime, says industrial cyclicals go up and down with GDP and industrial production (IP) trends and, as such, have suffered as the world economy has headed downwards.
He says: 'The US economy now looks like it will be weaker than was originally expected, which will mean a more protracted lean spell for industrial cyclicals. How much worse it gets depends on how much worse the US economy gets.'
Inzani says everyone is waiting for the US economy to bottom. When this occurs, he argues, three things will happen for industrial cyclicals: demand will pick up, supply will reduce and operational gearing will increase. All of these factors will lead to an explosion in profits for these companies.
Inzani says all sectors within industrial cyclicals are trying to reduce down their core competencies in an attempt to reduce their cyclical nature. He says companies are trying to find out what they are best at, as those who find a niche in the market are the ones that will prosper.
Roger Whiteoak, UK smaller companies fund manager at Framlington, says the issue with industrial cyclicals is the strength of the pound and, as such, they have had pressure put on them over the past few years.
He believes capital equipment has performed poorly over the past year as it was involved in the technology fall-out, with companies suffering from a lack of demand for parts. He adds that, at present, there is no indication of a bounce-back in demand.
However, there are some areas that are buoyant, according to Inzani. The oil industry is strong at the moment, he argues, and companies that make oil pumps or oil equipment, such as The Weir Group, are doing well.
Inzani says some sectors such as telecoms and technology, which were thought to be secular growth-orientated, could now be classed as cyclical.
• Companies' profits to rise when US bottoms.
• Oil-related companies performing well.
• Niche companies will prosper.
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