The rally in equity markets has been characterised by a major rotation at the sector level. Having performed very strongly in the second half of 2008, traditional defensive sectors have increasingly been used as a source of cash to fund increased weight- ings in the more econom- ically cyclical stocks as investors’ risk appetite has gradually returned.
The speed and magnitude of the cyclical rally has undoubtedly caught many market participants by surprise. Few would have predicted that, having hit a low of 51p in January this year, Barclays’ shares would currently trade above 280p although it is still trading a long way below the £25 it reached as recently as May last year.
The share price of global diversified miner Xstrata has also bounced strongly, doubling from just under £3 in early March to stand at closer to £6.50 today.
We entered 2009 aware that a raft of capital-raisings from companies looking to repair damaged balance sheets was likely to dominate sentiment in the early part of the year. These rights issues and placings have come through in force, providing investors with a range of investment opportunities.
The Swip UK desk has focused on those situations where we believe manage- ment are raising sufficient capital to fully address balance-sheet issues but also, in line with our research process, where the company has a winning franchise.
Wolseley, the global supplier of building materials, satisfied both these criteria and our participation in a share placing has been followed by a strong recovery in the company’s share price as commentators concluded that balance-sheet issues have been resolved.
The torrent of equity issuance has continued through the market rally, with many companies seeing their share prices move sharply higher on the announcement of capital-raisings. Others will no doubt be encouraged to take advantage of rising markets to address legacy balance-sheet concerns although a gradual reopening of previously closed alternative sources of finance may lessen the flow of capital-raisings.
Newsflow at both the corp-orate and macro-economic level has continued to deter-iorate in recent weeks although in some cases at a slower rate of decline.
The economic outlook remains challenging – recent GDP data confirmed that the UK economy declined by 1.9 per cent in the first quarter following declines of 1.6 per cent and 0.7 per cent in Q4 2008 and Q3 2008 respectively.
On the basis of current fundamentals, a number of highly leveraged cyclical names have, in our view, run too far too quickly. Valuations in a number of sectors are now discounting a V-shaped economic recovery although major question marks remain over the shape of any upturn when it comes. The possibility that recovery could be W-shaped or even L-shaped cannot be ruled out.
As we move towards the second half of 2009, we believe that the market will increas-ingly revert to focusing on stock-specific fundamentals. The rotation between the defensives and the economic sensitives which has driven markets over recent months should therefore become a less important feature.
The macro-economic backdrop cannot be ignored but the ability to identify comp-anies that are trading below their intrinsic valuation should once more reap rewards.
Peter Cockburn is investment director at Scottish Widows Investment PartnershipNo financial planningTax year Actual income Activity Relevant income Caught by new rules? 07/08 £145,000 None £145,000 No08/09 £149,000 None £149,000 No09/10 £159,000 None £159,000 Yes10/11 £169,000 None £169,000 Yes
Financial planningTax year Actual income Activity Relevant income Caught by new rules?07/08 £145,000 None £145,000 No08/09 £149,000 None £149,000 No09/10 £159,000 Pension contributionof £10,000 £149,000 No10/11 £169,000 Pension contribution of £20,000 £149,000 No