City Comment

17-February-2010

Twelve months ago I noted that, despite almost consistently negative news flow, staffing agency share prices had performed well. Fast forward to February 2010 and the reverse has been true - the trading environment is more optimistic yet share price declines have in most instances exceeded 10%.

Now admittedly, share prices have more than doubled from their lows and investor expectations have become more elevated but, if the companies keep delivering, what has driven the retrenchment? At the risk of boring you, macroeconomics.

The initial sell off in equity markets occurred when interest rates were raised and credit availability restricted in China, which increased fears that a key
engine of global growth would start to slow. Although US Q4 GDP growth was much higher than expected this positive was subsequently undermined when a weak non-farm payroll figure revived the spectre of jobless recovery. If China slows and the US doesn’t generate sustainable momentum, global recovery could disappoint.

A few weeks later, nervous markets were buffeted by concerns surrounding government borrowing in Greece and Spain, together with speculation that lacklustre action by President Obama to cut the deficit will cause problems for the US. Pessimists have suggested that the Euro single currency area could be in jeopardy. From a UK perspective, the worry is that developments in these countries could lay in store for us.

Putting aside macro doom and gloom, February was an upbeat month for the staffing sector. The US non-farm payroll for January contained very encouraging temp data. Temp volumes increased by 7% relative to December and, for the first time since March 2007, the year-on-year growth rate was positive. In the UK, the Recruitment and Employment Confederation (REC)/KPMG survey confirmed that UK trading momentum continues to accelerate. Elsewhere, Manpower reported much stronger than expected results and management noted “solid evidence of improving trends in nearly all geographies we operate in”.

One thing that isn’t in jeopardy is the scale of ambition of Russell Clements’ team at SThree. An otherwise uneventful set of results contained plans to aggressively expand the group’s overseas footprint over the next five years. If the risks associated with a global rollout can be managed, SThree will be one of the industry’s winners over the next cycle.

Kean Marden is head of support services equity research, RBS Global Banking & Markets, The Royal Bank of Scotland