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Our Outlook for Different Sectors

Quarter-End Insights: Morningstar examines the prospects for energy, financial services and more

Morningstar 28 March, 2012 | 2:46PM

After giving you our forecasts for equity markets and credit markets, Morningstar analysts have worked together to create some point form notes about the outlook for various equity sectors:

Our Outlook for Energy
• Geopolitics dominate oil markets, masking an underlying supply tightness and supporting high prices.
• US natural gas prices collapsed further this quarter, a sign in our eyes that E&Ps have finally capitulated. Now all that's left is the pain, as the industry works its way through the supply glut.
• Producers might not be quick to switch back to gas drilling, given the economics in liquids plays. This might support higher gas prices during the next several years, as we think producers will require strong pricing signals before once again ramping up gas production.

Our Outlook for Financial Services
• An extended rally in financial-services stocks, especially in the US, has drastically reduced the number of bargains in the sector.
• Emergency liquidity provisions have lessened the chances of a funding crisis in Europe, but the sovereign debt crisis is not over.
• Hints of an economic recovery have improved the prospects for rate-sensitive names.

Our Outlook for Consumer Cyclicals
• Signs of economic stabilization are encouraging, but there are still several reasons for caution.
• SG&A leverage will be additive, but we anticipate reduced margin expansion from consumer cyclical firms this year due to price competition, infrastructure and supply chain investments, and persistent raw material inflation.
• Large cash stockpiles and subsequent share repurchase programs still set the stage for earnings outperformance.

Our Outlook for the Defensive Consumer Sector
• The rate of input cost inflation is moderating, but foreign exchange headwinds are kicking up.
• Europe remains just as uncertain as it was this time last year, while the US less so, and now the Middle East is a wild card.
• Success with pricing has been all over the map.

Our Outlook for Basic Materials
• Our basic materials coverage universe has approached fair value compared with three and six months ago, when we saw many more undervalued names in the sector.
• Coal stocks have been hard-pressed by weakening metallurgical coal prices and low natural gas prices.
• Policy statements from Beijing and monthly data from the National Bureau of Statistics on fixed-asset investment, industrial production, retail sales, and real estate spending will be required reading for investors in the second quarter.

The following Morningstar analysts and researchers contributed to this article:
Jason Stevens, director of equity research for energy at Morningstar
Jim Sinegal, associate director of the financial team at Morningstar
R. J. Hottovy, CFA, director of equity analysis with Morningstar
Peter Wahlstrom, CFA, director with Morningstar
Lauren DeSanto, chief operating officer for equity research at Morningstar.
Ken Perkins, stock analyst covering consumer packaged goods firms at Morningstar
Elizabeth Collins, CFA, director of equity research at Morningstar.

Want more information? Read “Our Outlook for the Market” and “Our Outlook for Credit Markets”.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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