LEXINGTON, MA (December 18, 2009) – The information technology and telecommunications stock sectors are expected to achieve robust growth in sales and earnings over 2010-2011, according to IHS Global Insight World Industry Service's Stock Sector Rotation Rankings. Technology sectors are forecast to grow at twice the pace of gross domestic product (GDP); telecoms are forecast to grow some 50 percent higher than the overall U.S. stock market during this period.
The findings are based upon the latest global forecasts that show which sectors hold the most promise for stock investors in the U.S. World Industry Service recommendations made last December have subsequently out-performed the markets in the U.S. by 181 basis points, respectively, in 2009 (January – December 11, 2009).
World Industry Service Managing Director Mark Killion said the findings point to a large overweight position in investors' equity portfolios for IT and telecoms stocks.
In addition to growth, the valuation of equities in these sectors is at historically attractive levels. The dividend yield for IT is twice the average seen over the past 13 years, and the price-to-earnings ratio is half the historical average. Also, investor friendly payout ratios are on a secular rise, a reflection of the sizeable cash balances and solid balance sheets enjoyed by many companies in the IT sector, both of which are especially attractive characteristics in the current environment.
The prospects for telecoms are also positive, albeit more so in Europe and emerging markets than in the U.S. In contrast with the technology sector, telecommunications companies are less efficient with use of capital and debt. However, similar to IT, telecoms companies have great valuations and solid growth in free-cash flows. A dividend yield of 5.6 percent is almost double telecoms historical average, and is well above the yields earned in other U.S. sectors.
Other sectors given a modest overweight recommendation include consumer staples, energy and utilities.
IHS Global Insight forecasts a modest, slow economic recovery in 2010. U.S. consumers will spend again, but do so more cautiously than in the past because of high debt burdens, depleted wealth, tight credit and weak labor markets.
As a result, several sectors that previously have led the stock market during the recovery phase of the business cycle will not necessarily lead the way in this recovery. For example, the consumer discretionary sector is not expected to perform as well as in previous rebounds. While sales growth will recover from the depressed levels of 2008-2009, they will remain well below the levels associated in the past with normal business conditions. The World Industry Service recommends an under-weight position because the valuation of consumer discretionary sector equities is not especially attractive and the pace of recovery is muted.
The industrials sector is highly cyclical, but typically lags behind during the early phases of economic recovery, only gaining significant momentum later in the expansion. The experience may be worse in this cycle as industrials suffer from exposure to the weakest parts of the economy, such as autos, construction and business investment in machinery and heavy equipment.
Other sectors given an underweight recommendation include financials, health care and basic materials.
IHS Global Insight's sector rotation strategy is based upon the company's expert macroeconomic, industry and financial analysis. It is part of its World Industry Service Stock Sector Rotation Strategy, which assists asset managers in identifying the most profitable sectors for investment in global stock markets. To see the full sector rankings and for further information visit: www.ihsglobalinsight.com/SectorRotation.
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