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Recession-ready sectors

Created:
8 July 2008
Written by:
Algy Hall

Judging by the recent tribulations of consumer-sensitive and cyclical sectors, chancellor Alistair Darling may be the only man left in Britain who thinks the country can avoid a recession. The market doesn't seem to think it can; the pricing of vulnerable sectors clearly suggests that they’re braced for plenty more awful economic and corporate news.

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But Mr Darling might yet find humble pie on the menu, equity investors might get to have their cake and eat it. That's because much of the damage has already been done to equities in valuation terms, the market having anticipated a recession rather than waiting for politicians to acknowledge one.

July has seen the earnings multiples of seven out of 48 FTSE All-Share sectors hit 20-year lows. These sectors are consumer services, general retail, travel and leisure, multi-utilities, household goods, banks, and general financials. For example, the multiple commanded by the general retail sector has fallen by a quarter over a month, almost a third over the last three months, and two-thirds over a year. It now stands at less than seven. True, earnings are set to fall, and probably severely, but a major adjustment in preparation for this has already been made. So there are grounds to hope that equities, while likely to remain volatile, could soon be finding a base from which to recover.

However, any recovery is likely to take quite some time to develop, and there'll still be plenty of ways to lose money. As conditions in the real economy deteriorate further, companies can be expected to go under or refinance leaving shareholders out of pocket, as was the case recently with ScS Upholstery. There is also likely to be a lot more bad trading news ahead and profit warnings still have the ability to decimate share prices, as demonstrated by Marks & Spencer, Taylor Wimpey and Trinity Mirror in recent weeks. And betting on the main FTSE indexes is unlikely to help investors tap into the value on offer, due to the heightened representation of resources stocks, which look vulnerable if global growth slows.

Still, with prices at such extreme historical lows in many sectors and bearish market sentiment still prevailing, value may not be far off. Bottom fishing will require patience, a strong stomach and a spread of risk - unless Mr Darling's optimism should prove correct.

MORE SECTOR COMMENT...

For more SectorWatcher columns, see the SectorWatcher columnist home page.

For more articles on sector strategy, see the Sectors home page.

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