The Investment Column; Cyclicals and small caps swing back into favour
Thursday 24 June 1999
By contrast, cyclical stocks, the great unloved of 1998, have returned to favour. Some of the worst performers of last year such as mining, chemicals and construction have recorded some of the healthiest gains.
The mining sector, for example, underperformed the rest of the market by 22 per cent last year but has outperformed by 39 per cent in the first six months, helped by swings in commodity prices and a return of investor support. But can these trends continue?
A recent piece of research by the equities strategy team at Salomon Smith Barney compares the fortunes of what it describes as "momentum" and "contrarian" investors. At the start of every year a contrarian investor buys the worst performing 10 stocks of the previous year and sells the best 10. The momentum investor does the opposite. The theory is that the stocks they sell have as big an impact on their portfolio as those they buy.
Salomon's figures show that contrarian investment returns have only beaten the momentum brigade in five of the past 14 years. Last year would have been the worst performance for contrarian investors since 1984.
By contrast, the momentum investors would have enjoyed a storming 1998 with a combined outperformance of around 50 per cent buoyed by huge rises in stocks such as Orange, BT and Vodafone.
But there has been a shift this year with the worst performers of 1998 such as British Steel and BTR (now Invensys) recording big gains. The reason, Salomon says, is because of the change in the economic outlook, with fears of a hard landing last autumn proving unfounded. A rebound in expectations of an economic improvement in the US has also been a major factor.
The shift has had a dramatic effect on sector rotation and performance. Of the 10 best performing sectors last year only telecoms and electronics have continued to outperform over the last six months and even those at a lower rate.
But should we all be piling into Pilkington and ICI? Not necessarily. Salomon says that while there has been a shift in sentiment there is little scope for the earnings upgrades that will drive the share prices higher still. A further leg of outperformance therefore looks limited.
It is a view supported by Bob Semple, chief equity strategist at BT Alex.Brown. His view is that the bulk of the re-rating for cyclical-industrials, such as oils, took place in the first few months of the year and that further progress is limited until later in the year. Consumer cyclicals such as general retailers have not yet enjoyed such a recovery and require further evidence of a pick-up in Europe and Asia.
The equity team at Merrill Lynch is more bullish. It says the economic backdrop makes cyclicals and smaller caps more attractive than growth stocks and larger companies. It is most positive on banks, construction, engineers, brewers and gas while recommending underweight positions in pharmaceuticals, telecoms and media.
- 1 The BBC has just done more to eradicate ‘terrorism’ than all our wars since 9/11
- 2 Dog thinks owner is drowning in lake, dives in and tries to pull him out
- 3 Thank heavens for Louise Mensch and her foul-mouthed tweets to world leaders
- 5 Phil Neville backtracks on Tomas Rosicky 'I'd smash him' comments from Match of the Day 2
Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
Greece elections: Greek PM Alexis Tsipras takes aim at 'neo-liberal' Europe as country gears up for prolonged austerity battle
Auschwitz liberation 70th anniversary: Woman sent to three Nazi death camps describes surviving gas chamber
Prince Philip set to be knighted by Australia: Celebrate by reading his greatest gaffes
New York snow: Winter Storm Juno downgraded as 'one of the largest snowstorms in history' fails to show
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
Islamic history is full of free thinkers - but recent attempts to suppress critical thought are verging on the absurd
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
iJobs Money & Business
£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...