City Comment: No change to investment strategy as signs remain mixed
Fri, 11 May | By Kevin Lapwood, head of support services equity research, and Caroline de La Soujeole, support services analyst, Seymour Pierce
Times continue to be tough for recruiters who, over the past 12 months, have been the worst performing sub sector in our support services coverage. The Seymour Pierce Staffing Index was down 10% relative to the wider market over that timeframe.
With the economic outlook still very uncertain, investors have continued to gravitate towards defensive stocks. Early cycle stocks, such as recruiters, tend to perform badly in times like these but when the outlook starts improving, recruiters will be the first companies to see their share price rally.
After 18 months of underperformance is there any evidence that the tide may be turning for UK recruiters? With little news flow from UK-listed companies in recent weeks, we turn to wider macroeconomic indicators for clues. On the face of it market conditions remain uninspiring.
True, UK labour data was better than anticipated in April with the unemployment rate declining by 0.1% to 8.3% in the three months period ending January. However, one quarter of data does not make a trend. To put things in perspective, in the last quarter before the onset of the downturn, unemployment stood at 5.2%, there is thus still a long way to go.
The latest REC/KPMG ‘Report on Jobs’ was the bearer of some good and bad news depending on which side of the fence one stands: permanent staff placements were up for the fourth month in a row, albeit demonstrating only modest growth, but temp billings declined at the fastest rate in over two and a half years with the introduction of the Agency Worker Regulations distorting the picture somewhat we believe.
The Monster Employment Index, another indicator of activity we keep a close eye on, indicated that online recruitment activity in the UK had increased by an annual rate of just 1% in April marking a sharp slowdown compared to the 8% year-on-year growth recorded in March.
Another survey which recently came to our attention and which we thought had some interesting conclusions was that conducted by Barclay Meade. The spring ‘Tracking UK Recruitment’ reports that for the first time in four quarters the number of firms with a freeze on hiring decreased, down from 16% to 13% quarter-on-quarter.
Coming back to our original question, we conclude that evidence is mixed. It is too early to suggest we are nearing the bottom of the cycle. However, what is becoming increasingly clear to us is that we are moving in the right direction.
For now, our investment strategy remains the same: until we see more concrete signs of a pick-up in activity, the smaller capitalisation stocks, which often operate in niche markets, present the best value.
Despite the sector’s underperformance over the past 12 months, shares of recruitment companies, in our view, still do not offer good value trading on a hefty one-year price earnings ratio of 19x.
Kevin Lapwood, head of support services equity research, and Caroline de La Soujeole, support services analyst, Seymour Pierce