“Further malaise” in the trading of UK recruitment stock is expected in the near term, according to David O’Brien, recruitment and general smaller companies analyst at stock brokers Shore Capital Research.

O’Brien says: “We have been negative on the recruiters for much of this year, a period that has seen the sector rise collectively by just 1.2% in absolute terms, resulting in outperformance versus the FTSE All Share of 1.3% YTD. We expect further malaise in the near term as the current economic environment favours defensive stocks.

“Improved guidance during the forthcoming Q2 interim results reporting season is required to bolster share prices. Our belief is that H2 trading should be better, as investments by the sector’s incumbents pay off. We would therefore buy the sector on weakness as, in due course, investors will begin to focus on peak earnings, which we expect to be some way ahead of FY1 consensus expectations.

“The recent spell of underperformance presents a buying opportunity, in our opinion, while we think the malaise is likely to continue until a likely catalyst in the form of improved earnings guidance at the time of the Q2 interim results season (July to August) occurs. The illiquidity of much of the sector suggests that investors should start to dip their toes in now.

“We have mapped where we are in the cycle, in stock market terms. This suggests that we have roughly two years or so left in the current upswing (with profits continuing to rise for a short period following this). Should this prove correct, then we remain convinced that FY2012 is likely to be one of the strongest performance years for the sector since FY2009.

“In view of the time horizon, we think investors should concentrate on where they are likely to see the greatest uplift between FY1 earnings and those achievable at the peak. We map this inside but favour Michael Page, SThree, Hydrogen and Matchtech in particular. For a whole host of reasons, broadly unrelated to its recruitment activities (tough markets in public sector/slow recovery in financial services), our one sell recommendation is on Capita.”