For a sector as diverse as business services, it is unsurprising that as we enter 2016 the prospects of the companies within it are mixed. However, where we are in the economic cycle, or rather where investors think we are in the cycle, is a common indicator of how a number of UK-listed business services groups may perform over the next year.
Investor sentiment towards the recruitment sector seems to have taken a negative turn. Buy tips Michael Page (MPI) and Hays (HAS) have fallen substantially since the summer, with shares in the latter now 9 per cent below our original tip. It is not hard to see why the shares have taken a turn for the worse. In the last quarter both recruiters revealed a slowdown in UK growth and macroeconomic pressures in the Asia Pacific region, including China and Australia.
The performance of the recruitment industry is linked as much to people's perception of the economic cycle as the reality. Analysts at Numis think that, while "a combination of FX and the breadth of investment has constrained the potential for earnings upgrades in FY2015E", at Michael Page the recruiter's permanent bias could generate earnings upgrades this year. Hays suffered analyst downgrades to its forecast EPS this year after its second-quarter update revealed a greater weighting to the lower-margin Europe and rest-of-the-world businesses. We are still positive on the sector, as both Hays and Page have strong balance sheets. Analysts at Jefferies are still forecasting 10 per cent EPS growth for Hays in 2016, while the less mature Michael Page is still converting only around half its fee income into profit compared with its 2007 peak.