Investor attention is heavily focused on the resource and capital goods sectors. This is with good r...
Investor attention is heavily focused on the resource and capital goods sectors. This is with good reason given the apparently unstoppable rise of consumption trends and infrastructure spending requirements in developing economies, most notably China.
Yet, despite underperforming since their May highs, the mining sector has outperformed the Datastream World Market index by 275% and the oil and gas sector by more than 150% since the first quarter of 2000. This suggests some of the potential upside from these trends is already discounted even if valuation multiples are a long way from the stratospheric ratings the tech sector commanded at the 2000 peak.
So, where is the value in the equity market? Arguably it is in some of the themes that performed strongly in the peak of 2000, but have lagged since as global monetary conditions sought to reflate the world economy after the 2001 downturn.
One global theme is healthcare and the increase in demand for pharmaceutical products by an ageing population. For example, Pfizer, which traded on 60x earnings in 1998 after it launched Viagra, now commands a multiple of just 14x (even after rallying 30% from its year-end lows), while medical device maker Medtronic is valued at 20x current earnings, its lowest since 1994.
This sector de-rating has occurred despite the fact that earnings for the MSCI Healthcare sector have risen by 185% in the last six years, a nearly identical figure to the growth in profits enjoyed by the MSCI World Equity index over the same period.
As with the healthcare sector, technology stocks have lagged the broader market since the 2000 peak as the sector has heavily de-rated after the irrational exuberance of the late-1990s. In common with healthcare, longer-term (10-year) earnings growth for the MSCI Information Technology (IT) sector has matched the broader market.
Despite the disappointment of 3G telephony failing to deliver the potential that was hyped at the end of the last millennium, there is no indication that the application of modern IT has run its course.
Even in telecoms, data from the GSM Association shows there are more than two billion users of mobile telephones globally versus about 250 million in 1999. Where the beneficiaries of these trends were valued incredibly highly in 2000, now a company such as Vodafone has a dividend yield of more than 5.5% and a P/E multiple below 12x. Equally, in IT hardware, computer component manufacturer Intel can be bought on a 14x P/E multiple (and whereas at its peak, the market cap of Intel was more than 10x that of the entire gold mining sector, it is now capitalised at just 80% of the gold producers).
Another global theme is the environment. The strong economic growth of the last five years has not been without its costs. The recognition of environmental degradation has become increasingly widespread. There has been the advent of carbon emission trading in Europe as governments seek ways of encouraging pollution control through pricing mechanisms.
Meanwhile, in China, after a number of serious accidents, there has been a shift in emphasis from achieving economic expansion at any cost towards considering the quality of the growth achieved. The clear beneficiaries of this increasing environmental awareness are the water, waste and environmental management companies that help clean up the effects of industrial processes.key points
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