Stock Market Week - If you think history repeats itself, don't follow the herd
Monday 13 December 1999
Sociology gurus can barely disguise their glee at seeing their pet theory - that human beings behave like a flock of sheep - come to life in the world of equities.
The current Internet craze is but the last example of an all-too-familiar pattern. A few web stocks rise - be it for their rarity value or their underlying strength - the tongues, or the Internet bulletins, start wagging, and before you know it retail punters from Aberdeen to Penzance pile into anything with a whiff of dot.com.
Fund managers are no better. Frightened at the prospect of sliding down the quarterly performance league, these experienced and professional stock pickers stick as close to the crowd as they can in a desperate effort not to underperform their peers.
Of course, being part of the herd has some advantages. For a start, the weight of money thrown at the chosen stocks is in itself a guarantee that they will go up for a while. Second, in a bull market, there is little risk in backing the rising equities. And last, but not least, you are less likely to be noticed when you make a mistake.
The only problem with this me-too strategy, especially for retail investors, is that it is almost impossible to outperform the market and, more worringly, when the bubble bursts you will be slaughtered with the rest of the herd.
Investors who want to avoid such a sorry end could do worse than trying a "contrarian" approach - ie buying into bombed-out sectors.
The appeal of this strategy is enhanced by a recent study which shows that contrarian punters do well in the first quarter of a new year.
According to Robert Buckland and Jonathan Stubbs, UK equity strategists at Salomon Smith Barney, seasonal investors have had a remarkable run over the past six years.
A look at equity trends since 1993 suggests that the market boosts the previous year's losers and takes profits in the winners during the first quarter.
This trend is not evenly spread over the first three months of the year. The Salomon's strategists have found that in January investors still buy into last year's winners, but in February and March they switch to the losers. The consistency of this behaviour is quite extraordinary - out of 36 months in the past six years, only two failed to conform to this pattern.
So, what should investors who want to stand out from the crowd buy in February and March? The general rule is to get out of hi-tech and financials and plunge into retailers and utilities.
In the year to date, the world and his mother have been buying telecoms, computer, banks, media, and, of course, Internet stocks. By contrast, general and food retailers, consumer products companies, water and electricity groups, have had a terrible time and could be due for a rebound.
There are, of course, plenty of good reasons for the poor performance of these sectors - pricing pressures, regulatory squeezes and anaemic sales growth - and some of them will probably still be valid in three months' time.
However, some of these stocks do offer some value and if you believe that history will repeat itself, a punt against the herd could be rewarding.
UK investors will have plenty of time to think about next year's stock picks this week as the results schedule is very thin.
With a dearth of companies reporting, economics data will dominate the agenda. Last week the Bank of England decided to leave rates unchanged at 5.5 per cent but a raft of data due out this week will give the Bank's Monetary Policy Committee plenty of food for thought.
The November figures for inflation, scheduled for tomorrow, will be an important pointer to the future direction of interest rates. The key measure of inflation has been below the Government's 2.5 per cent target for seven months and November should be no exception, with economists pencilling in a 2.2 per cent rise.
However, the growing disparity between the falling prices of goods and rising prices of services poses a bit of a dilemma for the MPC's sages.
Wednesday's employment numbers should provide further ammunition for the rate hawks. The Deutsche Bank economics team believes that a tight labour market should have pushed wages 4.8 per cent higher, well above the MPC's 4.5 per cent target. Rising wages will also be greeted with dismay in many boardrooms as they usually pave the way to higher inflation and lower profit margins.
Die-hard company watchers will have to be content with figures from just one blue chip.
Daily Mail & General Trust, on the block on Thursday, should report a near 8 per cent rise in full-year pre-tax profits to around pounds 205.5m, thanks to good growth in advertising revenue and sales of its titles.
The publisher of the middle-market tabloid and a host of regional titles will be quizzed on the progress of its Internet ventures. The company owns a website aimed at women charlottestreet.com, which has gone head- to-head with Boots' handbag.com for the lucrative female e-commerce market.
The group's online retail joint venture with Arcadia, Zoom, will also come under scrutiny, with analysts keen to know if the fashion chain's problems have affected the web business.
Progress on the recent pounds 121.5m acquisition of regional newspaper group Bristol United Press will also be high on the industry experts' list of questions.
A former FTSE 100 member, the security group Securicor, will report full-year figures on Thursday. Pre-tax profits should come in at pounds 58m, compared with last year's pounds 85.8m. However, after selling its 40 per cent stake in mobile phone operator Cellnet to BT, the company is a pale shadow of its 1998 self.
The pounds 3.15bn disposal has triggered a 492p-per-share cash return to shareholders and sparked a wave of takeover rumours. Rivals such as Williams and Rentokil, and venture capitalist groups, are said to have had a look and the Securicor management can expect a robust grilling on the benefits of independence.
Two old bid chestnuts will fly the flag for the midcap tomorrow. The holiday group First Choice saw two offers, from Swiss rival Kuoni and domestic competitor Airtours, collapse and is now settling back down to life as an independent entity. Its rivals' comments on current trading have been mixed, with Airtours reporting buoyant bookings and Thomson Travel lamenting a lack of tourists.
First Choice's performance should boost the optimists' camp, with pre- tax profits expected to rise some pounds 5m to pounds 52.3m
As for Greenalls, final profits should come in at around pounds 100m but comparisons with last year will be clouded by the sale of most of its pubs to Scottish & Newcastle.
The company is now left with its De Vere chain of upmarket hotels and looks more and more like a sitting duck. A tie-up with fellow struggler Swallow was mooted. However, after Whitbread's bid for Swallow, a takeover of Greenalls - by Whitbread, Bass or Granada - looks even more likely.
Two furniture groups should provide further evidence of a pick-up in the once-depressed market. Carpetright, interims tomorrow, should report profits of pounds 15m compared with pounds 10.9m last year. On Wednesday, the recovering MFI should post an 8 per cent rise to pounds 9.5m.
THE WEEK AHEAD
COMPANY EXPECTED PBT* LAST PBT
Greenalls pounds 101m pounds 158m
First Choice pounds 52.3m pounds 47.7m
Carpetright pounds 15m pounds 11.6m
Hampson Inds pounds 4.3m n/a
MFI pounds 9.5m pounds 8.8m
Daily Mail pounds 205.5m pounds 189m
Securicor pounds 58.7m pounds 85.8m
COMPANY EXPECTED PBT* LAST PBT
* PBT- Profit before tax
ECONOMICS NEWS: Monday: Producer prices, Nov; CBI business and prof service, Qtr; German consumer prices, retail sales; Japan Tankan survey, Dec. Tuesday: Consumer prices, Nov; Engineering turnover, Oct; Chancellor Gordon Brown testifies to Treasury committee on pre-Budget report and IMF, 4.15pm; US consumer prices, retail sales, current account balance. Wednesday: Labour market statistics, Oct/Nov; Overseas direct investment; Treasury releases latest summary of independent economic forecasts; US industrial production. Thursday: Retail sales, Nov; CBI industrial trends, Dec; Treasury questions to Gordon Brown; German Ifo business climate; US trade deficit. Friday Overseas travel and tourism, Oct.
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