In contrast to the technology sector, companies in the telecom sector have a lot of debt on their balance sheets, so we continue to view the group with caution. However, we are seeing credit markets loosen slightly, which might allow the sector to roll over that debt and continue to invest in their businesses.
Positive factors for the telecommunications sector:
- Wireless demand appears to be increasing as more communication and media devices move to the wireless arena, although some of that movement is likely to take away from fixed-line revenue.
- The higher dividends typically paid by telecom companies are increasingly attracting investors tired of paltry fixed-income yields.
Negative factors for the telecommunications sector:
- Consumer spending on telecom compared to total spending is now falling, which has typically coincided with underperformance for the sector.
- Net profit margins are declining for the telecom sector as competition squeezes margins.
- The telecom sector has the highest debt-to-equity ratio of any nonfinancial sector. That could hurt the group in this time of tight credit.
Utilities: Marketperform
Similar to the telecom sector, we're certainly not in love with the utilities sector and recognize the numerous issues it faces. However, the group remains somewhat attractive as investors search for areas of the market that pay a bit more in dividends, given current low yields on fixed-income investments and the extension of the reduced dividend tax rate.
As a result, we're holding our rating on utilities at marketperform, but watching for a potential downgrade should economic growth continue to accelerate.
Encouragement for the sector also comes from developments in Washington. It appears that many of the onerous and costly environmental regulations under discussion are on hold, at least for the near future. This helps provide a measure of certainty to the sector.
All is certainly not perfect with the sector. With housing still struggling, the demand for utilities continues to be relatively weak, which would seem to limit growth—although a glimmer of hope is emerging with electricity production starting to grow again.
We believe there are just enough positives for the utilities sector to warrant a marketperform rating—for now.
Positive factors for the utilities sector:
- Dividend-paying stocks remain attractive as long as yields on conservative fixed-income products remain relatively low. And should economic prospects decline more than currently expected, defensive, dividend-paying stocks could become even more attractive.
Negative factors for the utilities sector:
- Utilization rates of electric and gas utilities have moved down modestly while production has spiked, indicating a potential oversupply issue that could pressure margins.
- Electricity prices have weakened as a result of dampened demand during the global recession.
- Capacity growth has been rising, which has been a sign of underperformance for the sector in the past.
About Schwab Sector Views
Schwab Sector Views were developed by Charles Schwab & Co., Inc.'s ("Schwab's") Investment Strategy Council. Schwab Sector Views are Schwab's outlook on the 10 broad sectors as classified by the widely recognized Global Industry Classification Standard groupings. The GICS structure comprises sectors, industry groups, industries and subindustries. Schwab Sector Views are at the sector level. While Schwab Equity Ratings and Schwab Industry Ratings utilize a disciplined approach that evaluates all stocks (Schwab Equity Ratings) or all industries (Schwab Industry Ratings) in the same manner, Schwab Sector Views uses analytical techniques and methods that vary from sector to sector.
Explanation of columns in the table: The benchmark weights are provided for reference and represent each sector's market capitalization weight in its index.
Schwab Sector Views represent our current outlook on each particular sector. All investors should be well-diversified across all sectors. However, investors who want to tactically overweight or underweight particular sectors may want to consider our three- to six-month relative performance outlook reflected in this column. These views refer only to the domestic equity portion of investors' portfolios.
How should I use Schwab Sector Views?
Investors should generally be well-diversified across all sectors, at or near the respective sector market capitalization weights relative to the overall market (benchmark). However, investors who want to make tactical shifts to those weights with a goal of outperforming the overall market can consider the Schwab Sector Views as a resource. Schwab clients can also use the Stock Screener or Mutual Fund Screener to help identify buy and/or sell stock or mutual fund candidates in particular sectors that they may be underweighted or overweighted in their portfolios.
How to use Schwab Sector Views in conjunction with Schwab Equity Ratings
Sector diversification is an important building block in portfolio construction. Schwab Sector Views are expressed in terms of outperform, marketperform and underperform, and can be particularly helpful in evaluating and monitoring your portfolio composition. Schwab Sector Views can be useful in screening new stock purchases and in identifying portfolio holdings for possible sale. A review of sector weights coupled with individual stock concentration should be a critical measure of equity portfolio diversification. Schwab Equity Ratings provide an objective and powerful approach for helping you select and monitor stocks.
Important Disclosures
Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news.
Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. The table indicates returns based on gross returns. If commissions and other costs are deducted, the performance would be lower. Past performance is no guarantee of future results.
The GICS was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Diversification strategies do not assure a profit and do not protect against losses in declining markets.
The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice.
