S&P's Sector Signposts for 2009, Part 2
What can investors expect for key stock-market sectors? Analysts from S&P Equity Research Services offer their views in this two-part story (read the first part). Part two follows:
In light of the current financial crisis and the widespread negative impact it is having on the global economy, along with much lower oil prices and the adverse foreign exchange impact of a stronger U.S. dollar, we see ongoing weak operating results in many industrials businesses.
However, many governments throughout the world are planning substantial stimulus efforts. With these initiatives focusing mostly on firmer financial markets and considerable levels of infrastructure spending, we think the greatest beneficiaries will be the companies that sell construction equipment (part of construction and farm machinery, and heavy trucks) and, in certain cases, industrial machinery and building products.
We have a cautious view of the technology sector given the current U.S. recession and massive global economic uncertainties.
We think a decline in semiconductor sales coupled with largely fixed-cost operating structures will hurt 2009 profitability and earnings. As a result of this and an oversupply of chips, we expect equipment spending to decline 25% to 35% in 2009.
We also see a challenging environment for hardware, and project that global PC unit shipments will rise only 4% in 2009. For IT service companies, we forecast slower revenue growth. We think demand for business process outsourcing will increase as clients cut costs. Lower turnover and easing wage pressure should help offshore outsourcers.
We expect the decline in the housing market to continue, which should have an adverse impact on demand and pricing for wood products. Similarly, paper packaging companies, suffering from a weak economy and lack of available credit, should see lower demand for corrugated packaging.
In the chemicals industry, we expect lower chemical product prices and a focus on reducing inventories and purchases with end-market demand slowing. A slowing U.S. economy is likely to lead to lower domestic steel shipment volumes, higher imports, lower steel prices, and lower earnings in 2009.
We are positive on the telecom services industry, since we expect the carriers, through broadband growth and cost savings, to generate strong free cash flow to support dividends. We contend that bundled telecom services and, in particular, wireless will remain core to consumers, serving as a driver for the largest integrated telecom companies.
We believe that cash flows at independent wireless service providers in developed countries will be stable, but they could see margin pressure, as competition continues to intensify through price cuts, incentives, and handset subsidies.
Increased voice and data traffic, due to demand for new smartphones and unlimited packages, should spur growth for wireless tower providers.
We expect utility stocks to move in line with the broader market in 2009. We believe an above-average dividend yield for the S&P 500 utility stocks looks favorable. However, with the credit markets tight, many utilities have deferred some of their infrastructure expansion projects, and we expect to see capital expenditures for electric utilities reduced by more than 10%.
We see increasing profits for the electric and gas utilities from rate increases, population growth, expanded electric and gas transmission operations, and higher wholesale power margins (as expiring power contracts were renewed at higher prices), partly offset by uncollectible accounts and lower per-customer consumption.