Outlook: Cyclical stocks
Friday 23 April 1999
These trends are more pronounced on the Continent than they are in Britain, where the strong pound continues to damage traditional manufacturers, but even here the extraordinarily wide disparity in valuations built up in recent years has begun to narrow. If this helps manufacturers and leads to a more balanced approach to investment, it cannot be anything but a healthy development. But is it going to last?
There are obviously a number of good reasons for going back into cyclicals. The economic outlook is now much better than it was six months ago, while the turnaround in the oil and some other commodity prices has bolstered the view that maybe there's some earnings growth to be had from these companies after all.
In any case, with yields of 6 per cent and upwards and no sign of a dividend cut in sight, let alone deeper rooted financial problems, quite a lot of these stocks have begun to look exceptionally good value.
So there is no quarrel with the idea that cyclicals have been oversold and demand a rerating. More contentious is the belief in some quarters that the growth stocks of the IT, telecoms and life science sectors have had their day. Some areas of the IT industry in particular have become absurdly overhyped and overvalued - most notably anything to do with the internet. Even so, most of the factors that have driven up share prices in these sectors still apply.
In a low inflation, low growth environment, any industry or company with good earnings growth potential has a scarcity value and must therefore command a corresponding premium. Obviously, there's going to be a reckoning if they fail to deliver, but in many cases, the horizon in expectations is so distant that this doesn't look likely to happen any time soon.
What is certainly true, perhaps sadly, is that the shifting sands of sentiment have again demonstrated the investment advantages of indexation and the perils of stock selection. There are a few active fund managers, most notably Phillips and Drew, that have chosen to stick with value methods of stock selection through thick and thin, and they will have had the full benefit of the recent uplift in cyclicals. But most have not, choosing instead to follow the herd into the growth sectors. Relative to the market, they will have done quite badly so far this year.
However, those invested across the market as a whole will have barely noticed the rotation effect. What they've lost on the swings, they've gained on the roundabouts.
Culinary experts in The Netherlands thought it was 'fresh' and 'tasty'
Of all the computers Apple has ever made there’s only one that Steve Jobs had to sell his car to finance
Actress sees off speculation about her face in an amazing way
Marvel has released first teaser trailer week early after it leaked online
- 1 As an ex prostitute, I urge all the political parties to commit to the Sex Buyer Law
- 2 Nokia no more: Microsoft drops once-ubiquitous mobile name – in favour of its Lumia brand
- 3 Renee Zellweger on plastic surgery: 'I'm living a fulfilling life and I'm thrilled that perhaps it shows'
- 4 Australian café owner sparks debate after saying 'No' to having unruly children on premises
- 5 Couple die within 28 hours of each other after being married for 73 years
Renee Zellweger on plastic surgery: 'I'm living a fulfilling life and I'm thrilled that perhaps it shows'
Isis releases first video showing the stoning of woman accused of committing adultery as her father shouts 'don't call me Dad'
Banksy not arrested: Internet duped by fake report claiming artist's identity revealed
Diwali: What is the festival of lights and how is it celebrated around the world?
Nelson Bunker Hunt dead: Former world’s richest man dies in 'modest circumstances' in US after losing his fortune
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
iJobs Money & Business
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...
£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...
£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...