Biotech/Healthcare The misfortunes of the major pharmas dominate this sector as problems with new d...
The misfortunes of the major pharmas dominate this sector as problems with new drugs and patent expiry, particularly in 2006, hinder performance.
AstraZeneca, whose pipeline and earnings potential are both attractively visible, is one of the few exceptions to this scenario which means most drug companies are trading at valuations below market average. Smaller biotech firms have, however, done well, although they could fall back from here.
Dr Deane Donnigan, co-manager of Framlington Health, has been actively selling investments in this area. She says: "We have taken some profit in smaller names on good performance because the market is not adequately pricing in risk."
Those risks include necessary cost-cutting and forthcoming guidelines for generic biologic approvals, which could put some firms under pressure.
Devices should continue to deliver on the back of new products and continued dollar weakness, she adds.
Manager of Schroder Medical Discovery, Allison Larkin, is optimistic on another major move - reforms of the US" Medicare programme to subsidise prescription drugs. This should generate increased sales through greater usage - although patented drugs will have to compete with generic products.
Larkin is also upbeat on the major pharmas, believing pipelines will continue to improve on the back of significant product approvals made last year.
Expectations of better earnings in 2004 drove a powerful rally in the technology sector last year, which is continuing as those promises begin to bear fruit.
Software and semi-conductor manufacturers were the major beneficiaries of rising sales and dollar weakness, both of which boosted profits.
Robert Sellar, manager of the Dublin-based Aberdeen International Technology fund, says: "There is still overcapacity in commodity-type areas such as semiconductors but not among the leading-edge players, who will have pricing power."
Samsung"s Flash product, increasingly used for storing pictures in digital cameras, is one such player, he says.
Lindsay Whitelaw, fund manager of Artemis New Enterprise, agrees that the quality, well-financed firms can continue to perform well. He says: "We are cautiously optimistic. Earnings are coming through now which will support valuations at the next level.
"Stock selection will be far more important as there won"t be massive outperformance as there was last year. There certainly will not be a collapse."
Oversupply problems could also come to an end if spending kicks off again.
Sellar says: "The average age of capital equipment for S&P 500 companies in the third quarter last year was 6.34 years - 20% above the cyclical low - a healthy backdrop to future investment spending on technology."
China"s insatiable demand for raw materials to feed its manufacturing miracle and the infrastructure it requires shows no sign of abating. Higher inflation, increased commodity prices and bad bank debts suggest that the cycle may have reached its peak. But there is potential for the good times to roll on for at least the next six months, according to M&G.
Head of global analysis, John Hatherly, says: "It is all about shortage of supply. OPEC members can raise oil production above demand, but mining firms cannot as new projects take years to come online."
Oils therefore are relatively cheaper than mines which appear set to maintain their generous valuations. Meanwhile, gold, traditionally used as a hedge for the dollar, is benefiting from the currency"s weakness and continuing to make gains.
The big threat to the otherwise sunny outlook, says Hatherly, is the derailment of the phenomenal expansion in the Chinese economy, or if recovery in the US founders.
The sector is still attractive in the long-term because of the substantial consolidation it suffered just before this recent upturn.
David Whitten, head of global resources at First State Investments, says: "This has resulted in cheaper production costs, greater profit margins for smarter companies and generally better opportunities for investors."
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation