What can investors expect for key stock-market sectors in 2009? Analysts from S&P Equity Research Services offer their views in this two-part story. Part one follows:
Given S&P Economics' prediction of increases in the unemployment and savings rates in 2009, we see most consumer discretionary categories feeling the impact.
Elsewhere, foot traffic has fallen off at casual-dining chains, and a pickup isn't expected until late 2009 at the earliest. Housing prices are expected to continue to decline through mid-2009, but housing turnover is expected to remain at weak levels for the year.
The automotive industry faces a cash crunch, after posting the lowest sales in about 25 years during the past two months. We expect another contraction in light vehicle sales in 2009, with the Detroit Big Three losing further share.
In media and leisure, we expect overall traditional advertising spending to decline markedly in 2009, with sharp cutbacks from key categories (auto, financial services, retail, etc.).
We think the consumer staples sector is relatively attractive in the current difficult domestic and international economic environment, since we expect consumer spending on such items as food, beverages, and household products to be more constant than for more discretionary goods. Partly to protect or even expand market share, we expect increased marketing expenditures from branded products manufacturers. Also, we expect manufacturers to benefit from declines in commodity costs, including energy and various agricultural ingredients, but likely on a lag due to hedging or supply agreements.
We have a positive fundamental outlook on the integrated oils, which make up nearly 70% of the market value for the sector. And the group has the second-highest STARS ranking behind telecommunications. The sector also sports the lowest price-earnings ratio on projected 2009 operating earnings of all 10 sectors.
However, we expect lower projected energy prices will pressure 2009 earnings. The credit crisis is intensifying the impact on the energy sector, as capital spending budgets are cut and projects are delayed. We are pessimistic on supply trends, and see little help from President-elect Obama's energy policies, which are focused on reducing oil and gas consumption.
We also expect a sizable pullback in independent exploration and production (E&P) drilling budgets on weaker pricing, which should lead to lower production, earnings, and cash flows.
In the oilfield services and drilling space, we expect lower E&P capital spending to lead to decelerating 2009 demand for oilfield services (mainly in North America), but the offshore drillers should be better protected through a strong backlog of contracted work, especially in deepwater, where rigs are scarce.
Although we are concerned that weakening credit will continue to weigh on the earnings of diversified financial services companies and commercial banks, we are encouraged by market-share gains, and the validation of the large bank model in light of the demise of investment banks. We have a negative outlook on regional banks, as we think the weakening economy will hurt the credit quality of non residential construction and commercial lending.
Although managed balances have come under pressure, we look favorably upon the strength of the asset managers' balance sheet. We have a neutral stance on the property-casualty industry, as we think premium rates for many lines of coverage will likely firm (albeit modestly) in the aftermath of record storm and investment losses and the absence of competition, offset by balance sheet concerns. We also have a neutral outlook on the life and health insurance industry, as low historical valuations are offset by our concerns about weak revenue growth.
Although the prevailing view is that health care is a defensive sector and is recession-proof, we believe several issues, namely the global economic crisis, high unemployment, and the strengthening dollar, temper that viewpoint. However, we still see several bright spots including biotechnology, where we see solid growth and continued exploration of currently marketed products for new labeled indications
We see pharmaceutical firms bolstering their pipeline through acquisitions. The new administration should benefit the life sciences sector—Obama has stated he plans to double the research budget within 10 years, and we believe the general theme of cost-cutting should benefit outsource service providers such as contract research organizations.
We see high unemployment affecting managed care enrollment and prescription sales and believe Obama's desire to change Medicare part D to allow the government to negotiate pricing with drug firms will adversely affect sales.