Put your bet on telecoms, pharmaceuticals or utilities

STOCK MARKET investors divide into two breeds: the bottom-up variety and those who favour the top-down approach.

Broadly speaking, bottom-up investors select individual stocks, regardless of what industry they inhabit, on the basis of several tried and tested valuation methods such as price/earnings and price-to-sales ratios. The top-down variety tend to decide which sectors are likely to do well, and then pick stocks within those areas.

Over the past few days, most newspapers (including this one) have been littered with share tips for 1999. But few pundits have taken a top-down view. This is curious, if only because most large institutional investors in the City are doing little else.

Given the sheer size of the portfolios they administer, fund managers cannot just pick a handful of stocks and invest in them. So they start by spreading their cash across the various sectors in equal proportion to their weighting in the stock market. Then, in an attempt to beat the index, they vary their exposure to a number of sectors so that they are under or overweight to the industries they think are going to do well or badly.

As they do every year, equity strategists in the City have been drawing up their sector recommendations over the past few weeks. The consensus seems to be that the market is hard to call.

Last year the market was dominated by growth stocks such as the telecom sector, which almost doubled in value, and pharmaceuticals, which followed closely behind.

However, the experts wonder whether these sectors can continue to perform. "It's a very difficult market to read," says Richard Jeffrey, chief economist at Charterhouse Tilney. "It is very highly rated and I find it hard to believe that the pharmaceutical and telecom sectors can continue to run ahead."

However, most observers are also convinced that companies whose fortunes are closely linked to the performance of the economy will continue to suffer.

Even though few expect a full-blown recession, they think the new year will be marked by more profit warnings. "We've still got some disappointing news to get through over the next few months," says Bob Semple, equity strategist at BT Alex.Brown.

As a result, Mr Semple advises investors to stick with the "safe" sectors that are not dependent on the state of the economy. Apart from telecoms and pharmaceuticals he points to traditionally defensive sectors such as utilities and food.

Mr Jeffrey is more optimistic. He suggests the economic slowdown may be less severe than expected, and suggests that stocks in the breweries, pubs and restaurants sector could do well.

Meanwhile, he argues that small and mid-cap companies, which have dramatically underperformed the larger stocks in recent years, could come into their own. "There is good value in small caps," he says.

Those defensive noises are echoed by Goldman Sachs, which advises clients to be overweight in utilities and consumer goods but to avoid the financials and capital goods industries.

The fear of banks is a general theme. After the shocks of the past year, when the world financial crisis left many banks nursing heavy losses, strategists are reluctant to consider the retail banking sector, even though it has trailed the index. "We still don't know what kind of provisions they are going to have to take," says one analyst.

So is there no hope for the industrial stocks that have been heavily clobbered by the strength of sterling and the Asian crisis? According to Mr Semple, there is one ray of light: the prospect of sterling losing ground against the dollar and the newly-formed euro, which would ease the pain for exporters.

Until the economic picture becomes clearer, however, the verdict from most experts is to stick with those sectors that have done well in the past year.