Recruitment sector Scrooged

The recruitment sector has seen more cuts than chancellor George Osborne's Christmas turkey, as City analysts across the board slashed earnings estimates following dour trading updates from recruitment companies SThree and Michael Page . It was the rapidly slowing rates of overseas growth which caused the downgrades to come thick and fast, as analysts reviewed those companies with an international footprint. This wholesale sell-off could have created investment opportunities, but only for the patient investor as the situation could worsen before it improves.

Considering the downbeat mood in the global economy and news of slowing growth in emerging markets, the downgrades should come as little surprise, especially to those who followed our advice on 13 September (Crunch time for recruitment) when we highlighted that the Christmas season would be a key time. We were particularly concerned about Michael Page due to its sky-high rating and exposure to a global slowdown - concern that has proved prescient.

Growth rates in Asia fell to 26 per cent, from 44 per cent in the third quarter, with a similar picture in Europe, Middle East and Africa. So Michael Page is still growing, but not fast enough to warrant its racy valuation. And these numbers have a direct read-across for other names likely to get caught up by a global slowdown such as Harvey Nash , Hays , Robert Walters and Sthree ; all of whom were downgraded by analysts despite their strong balance sheets and dividend prospects.

But it isn't all bad news. Michael Page reported that profit in its UK division actually grew by 1.2 per cent in October and November. This isn't much help when you generate the lion's share of your profits overseas and, admittedly, it is glacial growth, but it does provide some succour for UK-focused recruiters.

And the investment case was given further weight by the joint Recruitment and Employment Confederation and KPMG Report on Jobs, which showed rising demand for temporary staff and a resilient market for engineering and IT staff in the UK. That makes both Matchtech and Morson worth considering. Our favourites in the sector remain Staffline and Impellam both of whom boast strong balance sheet positions and pay decent dividends. But any enthusiasm must be tempered by the report's grim reading for the rapidly declining permanent job market. The outlook here is dismal into next year, so for now these are shares for the watchlist.

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