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When trading conditions are strong, most chief executives have a list of reasons why their company's business will hold up should the economic backdrop deteriorate. However, the harsh realities of the current downturn are exposing the veracity - or more usually otherwise - of these counter-cyclical arguments.
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Many such arguments sound rather dubious from the outset, such as Carpetright's notion that stretched consumers will continue to buy carpets to compensate for not being able to afford the indulgence of a holiday. Other arguments tend to hold more sway with investors, until push comes to shove. During the last downturn, serviced-office provider Regus managed to persuade many investors that backed its float that distressed businesses would be flocking to its centres to take advantage of its flexible leases. The reality was grimmer and Regus's US business ended up filing for Chapter 11 bankruptcy protection. For most businesses with counter-cyclical claims, it only takes a whiff of real trouble for investors to abandon their hopes. Indeed, Rightmove's share price falls suggest the erstwhile fans of the property website now take little comfort from its claims that a tougher selling environment for estate agents should encourage them to advertise more online.
What's more, Vodafone's recent shock sales warning suggests that even the market's most widely held and accepted beliefs about companies' defensive characteristics are set to be tested by the current downturn. So, for investors who really want to avoid nasty surprises, extreme cynicism as well as caution looks like the order of the day. Indeed, if a company's defensive characteristics have not been thoroughly proven, it’s worth reconsidering how safe it really is.
Nevertheless, some optimism can be taken from the fact that certain counter-cyclical arguments are actually being proved credible. Outsourcing group Capita, for example, defied those who doubted its claims that tougher trading conditions would force more businesses to consider cutting costs through outsourcing by unveiling a surge in its order book. Unfortunately, such events are proving to be an exception rather than the rule.
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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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
