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Investors get closer to consumer, but wary of surprises

LONDON/PARIS - As commodity prices fall and inflation expectations cool, brave equities investors are dipping their toes into sectors that are closer to the consumer, wary that a similar bounce in financials fizzled out.

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Travel, technology, retail and auto stocks have been the top gainers in the past month since oil came sharply off a peak of above $147 a barrel. The gains are in sharp contrast to their showing over the past year when oil climbed incessantly.

"This could be the start of the recovery in the market and it will be these groups that lead the way in that case, but we still need to see confirmation of the trend," said Philippe Gijsels, a strategist at Fortis in Brussels.

"There would be an upside of 30 percent from these levels if you believe in a real rebound, but you don't need to buy the first 5 percent --- you can afford to wait for confirmation and still have ample opportunity to make money," Gijsels said.

A Merrill Lynch fund manager survey earlier this month showed that funds ploughed back into these sectors, with a net 2 percent of respondents saying they were overweight in tech stocks in August compared with a net 28 percent saying they were underweight the previous month.

Tech, travel and leisure, personal and household goods, banks, media and retail recorded the biggest month-on-month changes in favour of net overweights, and oil was the biggest loser, with the net percentage of portfolio managers saying they were overweight slumping to 11 from 52.

Analysts warn that plunging into consumer-related stocks amounts to calling the bottom of the market, and few are ready to do that.

European stocks, measured by the broad STOXX 600 benchmark have fallen 24 percent this year, taken down by a credit crisis that forced banks to make large asset writedowns and slowed the economy.

The index has risen 4.5 percent since mid-July, but is still off around 32 percent from a multi-year peak hit in July 2007, easily satisfying most analysts' definition of a bear market.

"We have to be careful: the relief rally that we have seen over the last couple of weeks, is really nothing other than a relief rally," said Franz Wenzel, strategist with AXA Investment Managers in Paris.

"The fundamental problems haven't gone away -- we're in the midst of a European recession, we're seeing earnings decline and we still expect further downgrades. So the earnings side of the equation is still under heavy pressure," he said.

Inflation expectations as measured by breakeven rates -- the difference between yields on inflation-linked bonds and government bonds -- have come down sharply over the past month.

"The market had definitely been ripe for a bump on the upside after July's floor, and obviously hopes of lower interest rates have been helping," said Arthur van Slooten, a strategist at Societe Generale in Paris.

"(But) there are no clear scenarios at the moment."

False dawn

Investors could draw a lesson from their rush into beaten-down financial stocks when oil started falling.

Banks gained 19 percent between mid-July and mid-August as oil came off. But along came worries about U.S. home finance groups Fannie Mae and Freddie Mac, ensuring that the rally was short-lived, and the stocks fell 10 percent.

"Oils and materials came to a shuddering halt, and investors moved out into the next story, to pick the bottom in the financial sector. And they were wrong," said HSBC Investments' UK Chief Investment Officer Roger Noddings.

While financial stocks might have looked like bargains, consumer-oriented shares do not appear cheap.

According to Reuters data, the personal and household goods sector trades at around 14 times next year's earnings, food and beverages at 15 times and retail at 12.

Contrast this with 7 times for oil, 8 times for banks and 10 for the broader market.

Wenzel said that there were some consumer-oriented sectors that were safer to venture into.

"In relative terms, consumer-related stocks will outperform. But we have to make the distinction between consumer discretionary and staples. Both sectors rallied, but we would continue to shy away from discretionary and prefer staples as economic growth decelerates further," he said.

And some retailers in the UK, where concerns over the economy are growing, are relatively cheap and could actually be worth the risk.

"The price to earnings ratio on Marks & Spencer is 5.5 on a trailing 12 month basis. If earnings were to halve, that would be a P/E of 11 with earnings at a cyclical low, which sounds good," said Noddings.

"If you wanted to pick the best performing share over the next six months you wouldn't choose a miner -- you would try to find a department store on five times earnings."