Shares digital

The woes keeps piling up on industries awash with bad news. Russ Mould surveys the battlefield to see who are the sector winners and losers for the first quarter

That just four of the 47 industry sub-sectors which comprise the headline UK indices registered a gain in the first quarter is a painful reminder of what a difficult year 2008 has been so far (see table). The FTSE All-Share has fallen by 11.1% as it has been rocked by the ongoing global credit crisis, disappointed by the rate of UK interest rate cuts and hamstrung by the absence of the merger and acquisition activity.

Finding that quartet of winning sectors was no easy task either. Industrial metals consists of just 13 stocks and has a market cap of barely £7 billion, a figure smaller than nearly half of the FTSE 100’s constituents. Ukrainian iron ore expert Ferrexpo (FXPO) has led the sector higher, helped by Australian ferrochrome expert International Ferro Metals (IFL).

Automobiles and parts is even smaller, with just 16 constituents. FTSE 250 stalwart GKN (GKN), which has been boosted by its aerospace arm, has been the key performer here, and it represents 90% of the sector’s market £2.4 billion market cap.

Health care equipment & service’s performance is also skewed by one stock, in this case orthopaedics giant Smith & Nephew (SN.), although a bid for Whatman (WHM) from General Electric (GE:NYSE) helped to stoke interest in the sector.

At least avoiding the big losers has been more straightforward. Technology hardware is the year’s laggard, after profit warnings from ARM Holdings (ARM), CSR (CSR) and OCZ Technology (OCZ:AIM), to name just three. Demand for all of this trio’s products is heavily skewed toward high performance gadgets such as mobile phones or computers, where the credit crunch’s squeeze on consumers’ pockets is having a predictable impact.

This squeeze also meant the woes of the general retailers sector were not hard to foresee, either. High street heavyweights Next (NXT) and JJB Sports (JJB) have found the going tough, even if online upstarts such as ASOS (ASC:AIM) and N Brown (BWNG) continued to thrive.

Trickier to spot was the rotten showing by the fifth worst performer, food retailers. Tesco (TSCO), Sainsbury (SBRY) and Morrison (MRW) all fell by more than 10%, despite rampant food price inflation which should have boosted their top lines.

Food retail should still deliver solid earnings growth in 2008. This could look increasingly attractive if a global slowdown eats away at the momentum or more cyclical sectors such as industrial engineering. This sector was the fifth best performer in the first quarter, but could now have had its day if March’s thumping profit warning from German industry leader Siemens (SIEG:GDAX) is any guide.

Notable by their absence from the list of either the best or worst performer lists are the mining and oil & gas sectors. This omission seems all the more remarkable given how strongly commodity prices performed in the first quarter. After all, oil broke through $110 per barrel during the quarter and aluminium, copper and tin prices surged by 20%. The failure of Vale’s bid for Xstrata (XTA) did not help mining, and nor did BHP Billiton (BLT) making heavy weather of its approach for Rio Tinto (RIO).

Yet if neither sector could perform strongly when underlying commodity prices were firm, this hardly bodes well should they begin to soften in the event of a global economic slowdown. Investors should therefore be wary of adding to positions in these sectors, particularly as they remain heavily touted by the broking community.

Shares says: Stick with the more defensive sectors and stocks with fat backlogs.