Are There Any Safe Ports to Weather the Storm?

Mid 2007 was a tumultuous time for financial stocks, marked by the Bear Stearns debacle which culminated in the sale of the company in March. Many investors, thinking that the financial sector had resolved its issues and was on its way to recovery were hugely disappointed at the results, which showed that regional and investment banks declined by 17 percent in the second quarter of 2008. Since October’s peak, the stocks of financial companies have dropped 43 percent. An example of the uncertainty of the financial sector can be seen in that global investment company, Lehman Brothers, share sales were triggered by rumors that the company would be sold below market value.

Consumers are being pressured by rising food and energy costs, forcing them to cut down on non-essential items. This has had a profound effect on companies that manufacture and supply goods that households can do without when the going gets tough. Home repair products, cars, electronic equipment, furniture, tourism, entertainment, leisure products and even apparel suppliers are being hard hit. Consumer staples companies are facing the problem of rising costs for everything from manufacturing and packaging through to transportation. With consumer resistance to rising prices, many companies are taking the knock of absorbing production costs to the detriment of profits.

The health care sector is in a decline that is likely to continue. The primary reason for this being that approximately half of the health care sector consists of pharmaceutical companies, many of which are facing the reality that their expiring patents opens the way for competitive generic drugs. Moreover, in the ever-weakening economy, job losses are a harsh reality, making health insurance a luxury that a household with a compromised income just cannot afford. Investors are also concerned about the upcoming presidential election where a change in policy is likely to call for some form of universal health care, which would likely negatively impact on profits. Analysts are of the opinion that with calls for the restructure of the health care system, who wins the presidency is immaterial, as health care will need to be addressed as a matter of urgency by whoever becomes president.

Emerging markets, such as the oil-producing countries, have been reflecting a stronger growth than the U.S. However, inflationary pressures are starting to mount and many overseas markets are beginning to take strain. Europe is also facing slower economic growth and higher inflation, indicating that investors need to be cautious when investing in international markets.

The exceptions to the rule for the 2008 second quarter were energy, materials and technology, which showed profits during the second quarter and have a strong foothold in international trade which is likely to continue into the future.