It’s going to keep happening. So how should we play the field? Well there are three ways. One, directly investing in each country which in my opinion is a highly risky venture especially when inexperienced. Two, buying a 3^rd party investment vehicle (for example a mutual fund), however, with these uncertain markets the fees hinder absolute performance and performance is mitigated by uncontrollable factors. Three, buy domestic sectors and equities that are benefiting from the boom. For UK investors this could be the best recourse. This is precisely what has happened to both basic resources and industrials which have benefited enormously in 2006 rising 30% and 19% respectively. What about 2007?

Overall analysts expect 2007 profits for the FTSE All-Shares to grow about 6.3%. That’s considerably slower than 2006 where profit growth was strong running at about 13%. So why the considerable slowdown? The obvious point is clearly the base effect where in percentage terms growth will tamper off as a number gets larger. Basic materials are definitely one of the culprits where profit growth has slowed considerably from 43% in 2006 to an expected 9% in 2007. As such we expect a pause and back to reality price growth which should fall in line with profit expectations. Industrials however are another story.

Source: FactSet Estimates

The Industrial sector has shown consistent double digit profit growth. More importantly their up/down analyst revision ratio has turned positive. Up/down analyst revision ratio is a good leading indicator of price performance.

Consequently, the situation has not entirely gone unnoticed with P-E valuations trading at a 3 point premium to the FTSE All-Share. As such, we recommend investors to stay focused on companies in the industrial sector that have both positive sales and profit revisions, with valuations near the bottom half of the peer group.

These views are independent of FactSet Europe Ltd and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.