Richard Kommel Traditionally, geographical regions have dictated share prices. However the current market environment is a globalised one, where picking the right themes and the “best of breed” shares within these themes is key to success. Often, it is easier to identify the losing themes as opposed to the winning ones. At present, these appear to be the major global winning and losing themes. Losing themes l Cyclicals (chemicals, paper, metal and steel): These shares did not benefit from the weak euro and, as the euro strengthens, they are being adversely affected again. This excludes energy and oil which, we believe, have significant earnings momentum.
In the United States, natural gas prices have exceeded expectations with the rise in the oil price. There is consequently currently excess cash in these companies and earnings are very high. We strongly believe that second-quarter earnings for these companies will be exceptional.
l Automotive: There is currently an over- supply of motor vehicles and selling prices are under pressure. This has resulted in the car manufacturers having little pricing power.
There was a large demand for high margin sports utility vehicles. However, as oil prices have increased, demand for this type of vehicle has decreased. Furthermore, car sales have reached saturation in the United States, which further exacerbates earnings. l Defensives (tobacco, beverages, food, stores, pharmaceuticals and utility): These companies are operating in mature markets with no potential for an earnings upgrade. Companies like Unilever are failing to meet their earnings expectations. There is also too much government intervention in the utility market with proposed privatisation. Pharmaceuticals are also facing patent expiration that will lead to increased competition and reduced pricing power. l Technology, Media and Telecommunications (TMT): Media earnings have been downgraded for media companies. This is happening as a result of media companies “internetising” their business. This internetisation has been at a significant, irrecoverable cost with limited upside. l Advertising: The growth in dot.com business has contributed to a significant growth in advertising revenues, as branding has become an important differentiator. This appears to be unsustainable, though, as more and more dot.com companies are failing.
l Technology: Companies endeavouring to follow a business-to-consumer model are faltering as broadband cable rather than narrow-band cable becomes a necessity. Software companies’ earnings are also below expectation as IT sector spend has slowed down significantly. Winning themes l TMT: The winning TMT’s are those tech stocks that have sustainable business models and old economy companies that have shown significant evidence that the company has reinvented itself and where the company has a practical online application for its products. A good example is Tesco, which has built a substantial online trading business over the past six months. l Telecommunications: Here, winning companies appear to be those involved in establishing infrastructure, for example the electronic framework for mobile data, the upgrade of capacity utilising fibre optics and companies doing upgrades to broadband cable. Richard Kommel is a portfolio manager at Coronation Fund Managers in Ireland