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It's time for the pros to get their crystal balls out. Following a topsy-turvy year in which you could have made and then lost a small fortune on TMT stocks, we ask the experts which sectors will be the ones to look out for in 2001

If so, it is time to dust down old-fashioned phrases such as 'defensive stocks' and 'contra-cyclical sectors'. Defensive stocks are those in sectors which are traditionally less susceptible to swings in the economy, and usually fare better when the more fashionable sectors fall out of favour. They include drug companies and food producers. Contra-cyclical stocks, in contrast, tend to move against the general economic cycle, because they lag it or lead it.

On the defensive

In the contra-cyclical field, the housebuilding sector is looking increasingly attractive, as the stock market realises that the p/e ratios assigned to businesses such as Bellway are far too low.

There is also the prospect of consolidation in the sector - according to analyst Leslie Kent at Seymour Pierce, 'the companies in the sector have recognised the potential value in their peers, even if the stock market hasn't. There will be a lot of corporate activity, and a lot of consolidation in the next couple of months. This is marvellous for the stock market'.

In the past couple of years, it would have been possible to make money by throwing it at a few sectors: the Telecoms sector, with the explosive growth in mobile and internet telephony; Media and Photography, with its mixture of behemoths such as BSkyB and Emap, together with newer stars like HIT Entertainment and Sportsworld Media; and IT Hardware, which includes the companies which actually supply the parts for the much-heralded 'internet revolution'.

The return of stockpicking?

In 2001, will there be a similarly hot sector? Probably not. It seems likely that there will be a return to stockpicking, that is, spending relatively more energy in identifying particular stocks within a sector rather than choosing a sector in the first place. This is due to the fact that within the 'hot' sectors, there were some spectacular share price falls over the year. As 'silly money' chased share prices higher, when the inevitable happened and the bubble burst, prices came tumbling down. This led to 80 or even 90 per cent losses from the peak prices for some of the well-known internet businesses.

And the pain is set to last for a while longer, according to Alan Matthews, head of research at small and mid-cap stockbroker Beeson Gregory. 'There will be lots more profits warnings and downgrades in the technology field', says Matthews. 'Previous expectations will not be matched quite yet. Last year's activity certainly wasn't a freakish one-off, but having said that, prices will probably go down before they go up again'.

This pessimistic outlook will not, however, lead to a sea-change in the Beeson Gregory approach. 'We still look for opportunities on a stock-by-stock basis, although of course you need the sectors to give you some guidance. The electronics sector has not been as badly hit as, for example, the software sector. On the other hand, it would be a good idea to go for the companies which have already had the bad news, They are less likely to spring any more nasty surprises'. The three names Matthews and Beeson Gregory are keen on in the high-tech field are computer chip developers ARC, ARM and Parthus. 'Although these have been recently weighed down by negative sentiment, they seem to be over the worst'.

Go to the pub when things look bad

Other areas which Matthews predicts will make good investments include the Pubs and Restaurants sector. 'Pubs are very good traders in a slowdown. Some of them are on really low single figure p/e ratings, are at historic trading lows yet have very respectable earnings growth. They are good businesses and offer a very good return on their capital'. Such businesses traditionally do well even in a recession - although Matthews admits that a recession is an unlikely scenario.

The third area which is attracting a lot of interest is biotechs and pharmaceuticals. Rather like the high-tech sector, biotech in particular has had its trying times. 'But the fundamentals in the biotech world are in better shape than they have been for some time. There is a better range of activities, there is a better background, and each of the businesses is backing more horses'. Within this field, Beeson Gregory has highlighted pain relief drug developer CeNeS together with cancer therapeutics developer Oxford BioMedica.

In terms of a more general macro-economic overview, the resurgent Euro should benefit exporters, such as engineering companies like UCM, Chemring and Lincat.

Also, the environment of falling interest rates is usually good news for smaller companies. According to Matthews, this is because 'people are prepared to accept a higher level of risk in their equity investments. As money moves from bonds to shares, investors are looking for higher returns and thus are more prepared to take on more risk. This is good for smaller companies'.

Bags of value

The 'value' theme was echoed by veteran stock market watcher and stockpicker Mark Watson-Mitchell. 'The engineering and housebuilding sectors are still undervalued. They are strongly cash-generative, and there is bags of value which is not in the share price'. Amongst such companies he picks out aerospace and automotive engineer L Gardner, which has recently demerged its Direct Messaging business, and plant hire business Ashtead. The latter has recently completed a big acquisition in the US, which should see profitability double over the next two years.

One feature highlighted by Watson-Mitchell is the increasing prominence of short-termism. He believes that commentators and analysts are less prepared to make long-term predictions on the performance of the stock market and specific stocks and sectors. Everybody is viewing the market on a much more immediate basis', he explains, 'and they aren't taking a long- term view on things. If you have your money tied up in long-term share positions, you will be missing out on other opportunities that present themselves in the short-term'.

All has not changed, however. 'I still love core technology', he gushes. 'Until we stop watching television, using the telephone, using computers, the technology companies will be very exciting'.

Opportunities for the intelligent investor

Similarly, the Sunday Telegraph's Edmond Jackson believes that the twin interests of the coming year will be the recurrence of high technology themes together with a return to value investing - sometimes in the same stock. 'On the outlook for the year as a whole, I am pretty positive', he says. 'The 20 per cent dip in tech prices early last year was seen by the fund managers as an 'intelligent correction'. It has meant that there are lots of opportunities for the intelligent investor to capitalise on what I call the 'buying fear'. There is a good base from which to grow, as I believe that most commentators are overly bearish at the moment'.

In the technology field, Jackson is clear as to his criteria for spotting good investments: 'Companies which have been hit hard by adverse sentiment, together with those that are well capitalised in terms of their R & D and marketing spend - these are the ones to go for. Overall, I am optimistic that there are good times ahead, if we are prepared to do some active stock hunting'. In the IT services area, he picks out stocks such as enterprise software developers Merant and Parity as being particularly interesting, with communications software business Alphameric also appealing. However, he is 'cautious' regarding the prospects for the IT recruitment sector, believing that that there are 'too many people in the market at the moment. It is a classic case of supply exceeding demand'.

On this note, he believes that a combination of the 'top-down' approach and the lost art of stockpicking will be the wisest policy in 2001. 'I think it will be a good year for the stockpickers - but when isn't it? If you are looking for good sectors, for a top-down approach, then the property sector could be a good defensive play. There may well be value released from companies going private or being taken over, and some of the 'special situation'-type property businesses are worth a look. But I'm not very keen on retail property - recent retail figures have not been very promising'.

One popular sector, which is often mentioned in the same breath as 'defensive' or 'value' stocks, is the food sector. However, Jackson is not convinced. 'I feel that earnings are up with events at the moment' - meaning that the shares are fairly valued. The story is similar with the resources sector, which witnessed something of a resurgence last year. In contrast to Beeson Gregory's Alan Matthews, he is also not convinced of the attractions of the Pubs and Restaurants sector - 'I think we've got enough pubs and wine bars for the time being', he adds.

Overall, Jackson is confident that the coming year will be a good one. 'There is plenty of scope for 'macro style' sector picking, but the rewards will also be there for investors prepared to do their own research and have the courage of their convictions. There will of course be a certain degree of volatility in the market, but there will definitely be opportunities out there'.

No consensus

It is unlikely that there will ever be a consensus on where the excitement will be over the coming year. But it seems clear that the 1999/2000 hullabaloo over internet and high-tech stocks will not be repeated. And there will not be a similarly 'sexy sector' in the coming year. There will probably be a return to favour of stockpicking, while themes such as defensive stocks and cyclicality will be making a return to the investment lexicon.