The great August stock selloff has been far from uniform. Some sectors are now pricing in a far bigger risk of recession than others, leaving islands of potential value for the brave.
Current and implied earnings metrics show some cyclical sectors, including chemicals, faring better than defensives such as telecoms, while other cyclicals such as paper have already been sold down to below their post-financial crisis trough.
The disparity is "genuinely odd", said Ian Scott, global head of equity strategy at Nomura, citing the example of the oil sector, where stocks such as Total have passed their post-Lehman collapse price-earnings (P/E) ratio low even though oil has surged in value since then.
"The oil price, as a demonstration of the fundamentals of that market, just seems completely inconsistent with where oil company shares are trading," Scott said. Other cyclicals to have discounted a replay of the post-Lehman conditions "and arguably even something worse" include steel, construction and forestry stocks, Scott said, suggesting these all could be due a bounce if recession fears fail to pan out.
StarMine data shows a market-implied five-year annual earnings-per-share growth rate of minus 6.9 percent for paper firms, minus 2 percent for metals and mining stocks and minus 6.1 percent for construction firms, against minus 1.7 percent for the materials sector.
In others words, investors are pricing in an average drop in profit of those magnitudes for each year of that five-year period. Stocks trading below their post-Lehman trough on a regular P/E basis include UK oil firm Cairn Energy, on 7.56 times from a low of 20.42, and Finnish papermaker UPM-Kymmene , on 6.87 from 10.96, Thomson Reuters data showed.
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