There has been a demarcation between the sectors of the world market, according to Steve Danby, glob...
There has been a demarcation between the sectors of the world market, according to Steve Danby, global theme strategist at Henderson. 'Normally we would see similar trends between the sectors. However, there has been some diversion between technology, telecoms and other cyclical sectors,' he says.
Henderson remains positive on cyclical sectors and does not support defensive ones. Danby explains: 'Defensive stocks tend to be expensive and with the anticipation of US recovery, the markets are reacting positively to cyclical sectors, especially consumer cyclicals. We are shifting from interest rate cyclical sectors to economic cyclical ones.'
Peter Oppenheimer, chief investment strategist at HSBC, thinks that investors are turning to cyclical stocks. 'As we have seen the downfall of tech stocks, any sectors which are not tech have generally outperformed. Technology used to make up 30%-40% of investment in the market. Since the tech crisis, there has been a reallocation through markets. Defensive sectors have outperformed and as a result, such stocks have become pricey. Investors are moving to consumer cyclical stocks because consumer demand for goods has held up well,' he says.
Economies are thought to be resuming and the market has started to price in the anticipated recovery of the US economy. However, Dandy warns that the US is showing a U-shaped recovery, meaning it will drag on longer than expected. 'The markets have been unpredictable. Stocks outperform for two months and revert back to a low. We are seeing a typical bust and boom cycle,' says Danby.
In such a market, investors are reverting to examining the intrinsic value of stocks and investing in growth stocks which are likely to pick up when markets recover. Even through recovery, markets are expected to undergo slow growth. Richard Urwin, head of strategic research at Gartmore, comments: 'The US is one region which is going to experience the most changes in the sense that investors will not feel they are staring disaster in the face when they get up. However, growth will remain sluggish for quite a while. Asia is not looking good. The weakness in Japan will feed through to the rest of Asia. The region might not pick up until next year. The UK is being exacerbated by the strong pound but is holding up owing to its strong consumer spending. Continental Europe has experienced a mini-inflation shock due to high food prices while wages were left unchanged. The slowdown in Europe is temporary until the balance is restored.'
Urwin also points out that while the global market as a whole is decelerating, some emerging markets are doing well. This is because, as the prospect of returns from investment narrows from Western and Asian economies, investors are willing to take more risks to get a return.
Fund manager comment: Gartmore
In today's borderless marketplace, a global approach to stock selection is essential, enabling the leaders in each sector to be identified through analysis of industry and franchise strengths in a global context.
This approach highlights differences in industry strengths worldwide. Earnings growth in the mobile telecoms industry is under great pressure because of the huge cost of third generation licences and network upgrading. But new subscriber growth varies considerably worldwide, and we have identified NTT DoCoMo as one of the strongest. Subscriptions to its i-mode services are ahead of projections.
Within the pharmaceutical and healthcare sectors, our analysis has resulted in a focus on US companies such as Pfizer and American Home Products, reflecting the industry's positive demographics and the fact that the current US administration is likely to be less stringent on price controls than its predecessor. In terms of franchise, new anti-cholesterol treatment guidelines from the National Institute of Health have boosted the US market by around 20 million people ' one of Pfizer's main drugs, Lipitor, already has the largest share.
A similar ˜regional bias' is evident in Japan, since we believe its financial sector will benefit from the election of the reformist Junichiro Koizumi. Reforms already passed, and the prospect of further industry restructuring measures following Koizumi's visit to the US, will improve investors' perceptions of the sector, within which Mizuho is a major player.
Our analysis of the tech sector suggests a cautious approach since companies worldwide are still reducing their levels of IT expenditure. Until a recovery in demand is clearly under way, the sector is unlikely to improve significantly. On a positive note, we believe earnings of companies such as Gucci, Inditex, Pepsi and Danone will be buoyed by the strength of consumer spending, which is holding up well.
Neil Rogan is global focus fund manager at Gartmore
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