Uncharted waters for nervous analysts and investors

City experts on the industrial fallout from Tuesday's atrocities. There are not many positives

Economists and equity strategists who were predicting a shallow downturn or a recovery next year have had to quickly retract their positions after this week's terrorist attacks in the US.

Economists and equity strategists who were predicting a shallow downturn or a recovery next year have had to quickly retract their positions after this week's terrorist attacks in the US.

City experts are now advising that investors stick to defensive and quality stocks. However, the impact of events in New York and Washington are likely to be broadly negative across all sectors, especially if it pushes the US into recession. While some suspect an oil shock and a shattering of consumer confidence is possible, the impact on specific businesses will depend on how badly the economy is hurt, the monetary policy response and the nature of military and political reprisals. Sectors, such as oil and airlines, have already been affected.

All commentators admitted that the situation was uncharted territory. Michael Hartnett, of Merrill Lynch, said: "There is no road map. It is a completely unprecedented situation. Elements of 1998's LTCM [Long Term Capital Management] crisis, the Kobe earthquake and (worse case) the Gulf war are all apparent."

While Merrill Lynch expects the short-term impact in the first three or four months to be "unambiguously negative", Mr Hartnett, nevertheless, predicted a strong US recovery towards the end of 2002, on the back of robust fiscal and monetary support.

Aerospace/Engineering

Tony Lancelott, of Old Mutual Securities, said: "Civil aerospace will be negatively affected. Oil price spikes and an economic downturn are negative for corporate flying. There could be a fear of flying among the public, especially Americans, as there was in the Gulf war. On the defence side, there could be higher amounts of government spending but there's not going to be any sudden surge. BAE Systems is a prime defence play, whereas a company such as Rolls-Royce has a much higher civil sales bias.

"In engineering, the implications are broadly negative. Larger British engineers derive twice as much business from the US as from the UK."

Retail

Richard Ratner, a retail analyst at Seymour Pierce, said: "This tragedy cannot be positive for the retail sector. Now there is a greater danger that the effects of this terrible action will dampen consumers' enthusiasm. The most vulnerable stocks are those with exposure to the US, such as GUS, French Connection, Signet, Body Shop and Monsoon. If there is a recession the likes of Matalan and New Look that offer value for money will do better than the middle-market players. In relative terms, food retailers are seen as defensive."

Transport

A London-based analyst at a major international bank commented: "Airlines are worst affected. The loss of revenue is very significant. They have a very fixed cost base, whether they are getting in any revenue or not. The suspension in travel to the US is costing British Airways £7m a day in lost revenue. When it does resume, travel could be down 30 per cent, judging by the Gulf war. I will be downgrading my BA profit forecast for the fifth time this year. Low-cost carriers in Europe are not obviously affected."

Telecoms

One analyst at a leading European bank said: "Firstly if this results in a longer and deeper slowdown in the underlying economy, then clearly the sector has got exposure to GDP growth so in that context it's bad.

"In terms of the short-term impact, then clearly volumes of call usage have gone up materially in the last few days. The bigger issue, however, is what this does to the economic outlook and what this does to the availability of credit for the sector, which is broadly negative."

Banks

Martin Cross, banking analyst at Teather & Greenwood: "Some UK banks ­ like Barclays and HSBC ­ have seen their business affected because they trade in fixed-income investments, which have been suspended in America. But for most, the effect of the tragedy will be pretty small as their business is overwhelmingly domestic and in personal lines like long-terms saving and mortgages."

Leisure

Nigel Reed, at BNP Paribas, said: "Stocks with high fixed-cost bases will be worst affected, such as hotel companies that may see a downturn in their business. All the big groups such as Hilton and Accord have seen their share prices badly affected.

"On the opposite end of the spectrum, companies with a high variable cost base will be less affected. The degree to which tour operators will be affected will depend on what assets they have and where their customers come from. The ones with the biggest asset bases will be worst affected, like Airtours and First Choice which have some aeroplanes."

Oil and Gas

Tony Alves, analyst at Investec Henderson Crosthwaite, said: "There are risks of a substantially higher oil price if the Americans launch strikes. But it is likely that the Americans will first square any action with the Saudis, who will up supply if this leads to a spike in the oil price. Iraq might threaten to withdraw oil if, for instance, Afghanistan is struck, but this might just be sabre-ratting as they need the cash. So, if there is a spike, I think it will not last for very long. If economic growth is affected for other reasons, such as consumer confidence, this will mean lower oil prices and lower growth for oil companies. Either way, oil groups are not going to make money from these events."

Insurance

Kevin Willis, director of Standard & Poor's and insurance analyst, said: "It is inevitable that a lot of the claims will come home to roost at Lloyd's of London, as it is the major insurance market for catastrophe risks.

"This will have the effect of increasing costs of insurance across the industry. Rates have already been rising in the last 18 months, from being very depressed. This disaster will knock profitability again, and insurers will react by increasing premiums."

Construction

Stephen Rawlinson, an analyst at Peel Hunt, said: "If governments fear a downturn then they may further bolster the existing rises in infrastructure spend. There will also be much spend on the security of structures which will bring revenue into the consulting engineers and eventually the construction businesses. The UK housebuilders are likely to be more hit because few people will wish to take on a big mortgage at this stage of the game and buy a new house, however cheap the money. And because financial sector workers can forget a big bonus."

Technology

Keith Woolcock, a technology analyst at Nomura, said: "The outlook is not good at all. The first point is that the tech sector, most of it, is still overvalued and will continue to go down. No-one is going to be building new phone infrastructure. Capital expenditure is on hold and if you're exposed to the PC market or the mobile phone market in America, it's a fair bet you'll see weak sales over the next quarter because the American consumer is probably not going to do a lot over the next quarter. It will exacerbate the already difficult conditions. We think America will now go into recession for at least one quarter."