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In July, this column highlighted seven sectors that had seen valuations based on historic earnings plunge to a 20-year low and suggested that this could mean there was value on offer (see Recession-ready sectors). It seems other people had the same idea. The highlighted sectors have enjoyed a scorching run since then - but the glory may prove short lived.
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To recap, the sectors with valuations at 20-year lows were: general retail, travel & leisure, household goods, consumer services, banks, general financials and - in something of an anomaly to the cyclical theme - multi-utilities. Between them they have managed an unweighted average gain of 11.3 per cent in just under than one and a half months compared with the 0.4 per cent rise recorded by the FTSE All-Share index. In fact, no less than five of the seven sectors made it into the top-performing quarter of the 48 sectors that make up the FTSE All-Share. The poorest performance - a-not-to-be-sniffed-at 3.5 per cent rise - came from the least-cyclical sector, multi-utilities, while the precariously positioned general retail sector came out in front with a eye-popping 21.2 per cent rise.
However, such sharp rises look at least as worrying as they do encouraging for equity investors. It's not only that the thin trading volumes behind the recent ascents provide little reason to believe the rally is a good basis for a longer recovery. The improved performance has also come against the backdrop of worsening news from both the sectors concerned and the global economy, albeit with some hopes inflation could be set to ease.
In July, these sectors were priced for abject gloom, making it possible for them to rally against even the recent bleak backdrop. But the rally against such grim news is also a reflection of the fact that the market is shooting in the dark when trying to work out what fundamentals to value vulnerable sectors against. So, further big falls could follow when the next bout of nerves set in. A sustainable recovery is likely to be slower to emerge behind the large recent fluctuations. Defensive sectors, such as tobacco, look increasingly attractive in the context of this bounce by cyclicals and on-going volatility.
See also this week's Bearbull column on sectors poised for recovery - The scattergram approach
Sectors, not stocks and Four contrarian sector buys address the same theme.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
