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ANALYSIS-Thrifty spenders to squeeze consumer-related stocks

Published 08/26/2010, 08:18 AM
Updated 08/26/2010, 08:20 AM

* Outperformance of consumer-related equity sectors to wane

* Pessimistic macroeconomic environment to curb spending

* Pharmaceuticals, telecoms seen advancing this year

By Atul Prakash

LONDON, Aug 26 (Reuters) - The outperformance of European equity sectors that thrive on consumer spending is seen fizzling out in the rest of 2010 because valuations look unsustainable as a gloomier economic outlook and austerity plans hit wallets.

Analysts said the stage is set for some of the year's poor performers to come into the limelight at the cost of consumer-related segments, and favourites include telecoms, pharmaceuticals, utilities and oil & gas sectors.

Shares in personal and household goods, retail, travel and leisure, automobile and food and beverages have risen 7 to 11 percent this year, while construction and oil & gas have slipped 14 percent and 11 percent respectively.

The STOXX Europe 600 is down 2 percent this year.

Consumers spent money in the first half of this year believing the global economy was on a recovery path from the worst recession since the 1930s, but recent gloomy macroeconomic numbers have reignited fears of a double-dip. "If you are not sure about your job, the likelihood is that your consumption patterns will be quite different from when you feel a little happier about your job prospects," said Mike Lenhoff, chief strategist at Brewin Dolphin in London.

Though analysts say that the possibility of a double-dip recession is limited, recent jobless claims, GDP and non-farm payroll numbers especially from the United States, the world's top economy, have reignited concerns about the coming months.

A move by China to cool down its overheated economy, the second biggest in the world, has not helped.

"There has been a definite change in the market's perception of what may happen. A lot of optimism has been taken out of the market, particularly in June because of sovereign debt worries," said Richard Greenwood, fund manager at Bedlam Asset Management.

Total U.S. consumer credit outstanding shrank for a fifth straight month in June in the latest sign of Americans' reluctance to spend when unemployment is high and the economic outlook uncertain.

The Federal Reserve said this month that total outstanding credit, which covers everything from car loans to credit cards, shrank by $1.34 billion in June, less than the $5 billion forecast by economists surveyed by Reuters.

"I would expect that in countries where there is still a lot of hangover effect from the financial crisis, unemployment rates will stay fairly high," said Klaus Wiener, head of research at Generali Investments.

EXPENSIVE BETS

Consumer-related sectors have also become relatively less attractive on valuation grounds. Travel & leisure and retail both trade on 14 times one-year forward earnings, while personal and household trades on 15 times forward earnings.

In contrast, the STOXX Europe 600 index has a price-to-earnings ratio of 11, while the oil & gas sector trades on 8.8 times one-year forward earnings and utilities on 11 times.

"Consumers have spent in the last 12 months, but the picture can change now. Pressure would come not only from less spending, but also from valuation perspectives," said Christian Stocker, strategist at UniCredit in Munich.

Stocker said the broader market was seen ending flat this year and sectors such as retail and travel, which have outperformed this year, could suffer. He saw a flat close for consumer-related sectors this year, but predicted a 5- to 7-percent rise for telecoms and an about 10-percent rise in healthcare.

Other analysts said that a shift away from consumer-focussed segments would raise demand for traditional defensives such as pharmaceuticals, which trade on 7 times one-year forwarrd earnings, and telecoms, which are at a P/E of 10.

(Editing by Sitaraman Shankar)

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