Equities - for the recovery.
"When things are still looking pretty black, that is the time to buy," says Hoare Govett senior analyst John Houlihan. Easy stuff. But what if the cold hand on your shoulder hints that it is going to be blacker tomorrow? The only answer is that trying to pick the bottom is a fool's game. Better to be in early than too late. The recovery in the market can be gallingly quick or cunningly bumpy, and in the past it has preceded the economic recovery by a deceptive three to eight months.
Nomura Research associate managing director Shozo Ishibashi is one of the brave few already showing an interest in international recovery stocks. "The cyclical stocks recover quite quickly," he explains coolly. "And they may jump 100 or 200%. They're more interesting." These comments should be tempered with the point that Nomura does not foresee a global recession: a US slowdown, and maybe even a recession in the UK, but then a recovery from the spring of 1991. Overall Ishibashi likes cyclical stocks such as metals and chemicals, but in the UK he is sticking strictly with blue chips - British Steel, Glaxo, Grand Metropolitan. The UK market has in the past three recessions led the climb from the bottom, and it is the blue chips that foreign investors will dive in for.
Schroders Securities director Richard Harwood and consultant Roger Nicholas are representative of the more reticent view. "We would want to increase equity weighting sharply once the FT-SE 100 falls below 1,950," they say. They expect the recession to last through to the third quarter of next year and then "hopefully" recover. If the Chancellor is right about a short recession, a market dip, anticipating or reacting to the bad company reports expected in the spring, would be a good time to buy. If the recession drags on, better opportunities may well arise.
As recoveries characteristically are consumer led, the first flag of an upturn could be when unemployment stops rising or interest rates become more palatable. Retailing, entertainment, housing and services like packaging and advertising will show the earliest life. Then corporate investment will lob in, with business machines, construction, engineering, steel, chemicals and transport stocks feeling the relief. The stores sector, particularly heavyweights like Boots, Marks and Spencer and Kingfisher, are prime candidates as recovery stocks, though as they have some support even now, their gymnastics will be less dramatic than some.
Sectors which have had more of a battering, like engineering, communications, electronics and steel, could be livelier. The bombed-out stock of Storehouse interests Gartmore fund manager Duncan Trinder as a "longer-term" stock. Its earnings are low, but it is "clean, has good new management and should have net cash by the year end". Carlton Communications is another one which is out of favour and yet is a solid company with net cash.
At Schroders, Richard Harwood likes entertainment giants THORN EMI and Rank, "where you can genuinely see the demand", while Roger Nicholas goes for proven internationals like Rolls-Royce and Guinness. The banks are real nailbiters, but once the credit shakeout occurs, solid names like Lloyds and NatWest could benefit from less pressurised margins. Quality insurance brokers such as Sedgwick and Willis Corroon also spark interest. Brokers say that profits have been under pressure but could soon turn.