Investments go in cycles, and there’s an old adage that this year’s winner may be next year’s loser. Value fund managers agree with that.
While past performance of a share or economic sector provides vital data, further analysis is always required to determine what that information means – a fact only has relevance when compared to other facts.
2009’s winners and losers
What does it mean that the best performing sectors for 2009 (year-to-date, October 2009), were: pharmaceuticals +79%; media +67%; and IT and software +58%. The laggards were: coal mining –45%; forestry and paper –11%; and industrial engineering –6%.
A sector that performed well in 2009 will not necessarily continue to do so in 2010 – it may mean the exact opposite. An important factor to take note of is that we are still in a recession, but beginning to emerge from it. Economic sectors perform differently according to this cycle. IT and media companies, for instance, benefit early in the economic cycle – so IT companies will tend to perform well, and reinforcing this is that media companies have already run hard.
Matt Brenzel, portfolio manager at Cadiz Asset Managers, gives his sectoral recommendations: the IT sector and the consumer discretionary sector (the retail sector), as well as companies sensitive to the interest rate cycle, such as banks.
“Banks performed very badly last year because of the financial and credit crisis, and have scope for considerable recovery as the economy normalises.
Don’t ignore the economy
Sometimes, there can be a broad change in the global economy that undermines all economic data. One is the rise of emerging markets.
Brenzel says: “One sector where there has been an interesting evolution is the materials sector, including oil and commodities companies. In the past, this sector tended to lag the overall recovery cycle and rose with increases in interest rates. But the Chinese economic miracle and dollar weakness has changed this and it is now improving much earlier in the economic cycle.
“We have already seen gold shares, oil and gas all do well, and they will continue to perform well as the economic recovery gathers momentum,” says Brenzel.
“Towards the end of next year will come the time to opt for more defensive stocks (typical of a market that is already fairly priced): such as real estate; food and drug retailers; food producers and breweries; and healthcare companies,” he says.
However, this analysis needs to be done in conjunction with a look at the performance of individual sectors and stocks, because there may be justifiable reasons why a stock has over- or under-performed.
Construction slowdown
Another sector that underperformed last year and may hold scope for further recovery is construction and industrial engineering. However, Armien Tyer, MD of Sanlam Investment Management, believes the vaunted infrastructure story has entered negative territory. “There was R700 billion of budgeted infrastructure spend before the recession. That figure has to have been whittled down post-crisis due to banking constraints and the fiscal deficit.
“There is still massive infrastructure development going on, but it’s not the same as was reported two years ago. And many of the locations like Dubai, where our construction companies were doing huge developments, are even more weakened than the US market.
Tyer is keen on the telecoms sector, forestry and packaging and media. “These pockets are mostly to be found in the industrial sector, which is still waiting for positive earnings reporting cycles. However, by the time these results come out, they will already be in the price,” he adds.
