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Sector Picks
Sectors to target and avoid in 2008
May 08, 2008
Brendon Lau, ShareAnalysis
In the previous newsletter, we revealed our strategy team’s top-down analysis – in particular our view that the S&P/ASX 200 accumulation index is likely to deliver total returns of close to 10% over the next 12-months.
Today, we undertake a bottom up analysis – in particular analysing the sectors to be overweight and underweight in the current environment.
Consumer Discretionary: Underweight - Of all the sectors, consumer discretionary most highlights the ebbs and flows of consumer spending behaviour, advertising spend and investor sentiment through an economic cycle. While our forecast sector EPS Growth for FY08 is a very low 0.8%, the expected earnings recovery in FY09 of 23.2% remains vulnerable to weakening consumer spending trends and hence there remains room for additional P/E compression. We believe it is too early in the downward part of the economic cycle to warrant exposure.
Consumer Staple: Neutral - Defensive in nature, this sector nevertheless remains vulnerable to slowing economic conditions from P/E compression effects after enjoying favourable trading conditions for many years. Earnings growth for most in the Consumer Staples sector is limited.
Energy: Overweight - Ordinarily, this sector would have an underweight rating in times of declining global economic activity, but discretionary oil supply growth is not necessarily matching demand growth in recent years, with China continuing to lift its energy use intensity, and there is strong global demand growth for additional LNG, nuclear, coal and wind energy supplies.
Financials: Slightly Underweight - As for Consumer Staples; defensive in nature supported by solid yields and a large domestic business footprint. Nevertheless, the sector is at the coalface of the current US-led global credit squeeze. Large-cap banks are strongly preferred over Property Trusts and Regional Banks at this time.
Health Care: Overweight - It is difficult to have a general view on the sector, as there are many stock-specific drivers in this industry and companies of varying quality. On current forecasts, the sector is demonstrating strong earnings growth over the next two forecast periods but is consequently priced on a high forecast P/E multiple of 20.7 times for FY09.
Industrials: Underweight - General economic slowdown and rising inflation make this sector vulnerable to earnings downgrades, although sector-wide observations are difficult to make, as the sector is made up of a wide variety of companies. Within this sector, we would favour the Construction & Engineering sub sector, with strong order books and reasonable valuation metrics, complemented with a favourable outlook for the Road and Rail sub sector.
Information Technology: Neutral - Stocks in the sector are represented by strong earnings growth on reasonable P/E multiples; however, earnings may be vulnerable to slowing activity in the financial services sector, which uses the services of Computershare (CPU) and Iress Market Technology (IRE). Otherwise a more bullish weighting could be justified.
Materials: Overweight - Resource stocks make up the biggest component of this diverse sector and we maintain our bias towards this sub sector. Sustained demand for raw materials and an undemanding FY09 P/E of 11.9 times give little reason for P/E compression influences in this industry. Chemical stocks linked to the resources and agribusiness industries also have strong appeal.
Telecommunications: Overweight - Essentially this is a relatively stable sector with modest EPS growth, acceptable P/Es and high yields. This sector would be automatically underweight once greater clarity on world financial issues was seen and if a positive macro view resulted.
Utilities: Neutral - This is generally a defensive staple sector supplying and providing essential services to the economy. However, some vehicles are over geared and financially stressed, removing their ability to operate as defensive exposures from a share-price performance perspective. Hence, selectivity is essential.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this edition of CompareShares:
Sector Picks: Sectors to target and avoid in 2008
Resident Trader: Making money in a tough market
Property: Are tax concessions on property really worthwhile?
Stocks: Small, undiscovered stocks to watch
Companies: Qantas engineers poised to strike
Commodities: Petrol chief criticises Coles Express
Companies: Sims reports record NPAT of $80.3m in Q3
Finance: Lincoln questions health of financials
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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