The stock market has enjoyed a mini rally over the last quarter, led by the large cyclicals. With whispers about green shoots in some parts of the economy, the more optimistic investors have been looking for high beta [more volatile] stocks and have been switching into cyclicals. As these stocks have outperformed, those investors favouring safe stocks have came under significant pressure as they have been quickly falling behind their benchmark indices. This has helped maintain the rally and shares have only this week started to pause for breath.

This has been very beneficial for the highly cyclical recruiters and indeed over the past three months Hays’ share price has increased by over 10%, Michael Page by almost 25% and Spring Group by almost 40%.

So the main question now being asked is just how long can this last? Recent statements from Morson, Staffline and Healthcare Locums all confirmed that their trading is in line with expectations and that despite challenging markets they still see growth opportunities.

However, last week the outlook for the UK economy was thrown into doubt when the country’s sovereign debt ratings were downgraded from stable to negative by Standard & Poor, the leading rating agency. The reason for the downgrade was the burgeoning public sector net borrowing which reached £93.3bn for the 12 months ended April. S&P believe that the UK will have to reduce public spending and increase taxes — not good for economic growth. This seems to be more in keeping with the larger permbiased recruiters who are still having a torrid time. Robert Walters recently confirmed that it is likely to make a loss for the first half of the year and that the rate of decline in net fee income actually worsened in March and April.

Robert Walters shares have risen by over 20% in the last quarter in line with the rest of the sector.

This highlights the disconnect between current trading and stock market valuations. The market is always looking to the future and it appears more and more investors are looking to valuations two to three years out. When the market swings upwards it is usually very quick; however, it appears, for now, that caution is still merited.

Michael Vassallo, assistant director, equity research, Brewin Dolphin Investment Banking