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Investors may be well advised to steer clear of unionized industries such as autos, steel, rails and airlines, and go for technology stocks instead, according to a recent report by Steve Galbraith, chief investment strategist at Morgan Stanley.

Unionized industries are the most exposed to current macroeconomic woes, such as limited pricing power, rising pension liabilities and soaring health care costs, Galbraith reasons. "Heavily unionized industries appear to suffer from these plagues more than their nonunion brethren today," he said in the report, noting that their stocks have historically trailed the

S&P 500


Companies with union representation, as a result of having high fixed costs, are limited in their ability to change with market forces, at a time when flexibility is at a premium. So in a twist, Galbraith is advising investors to trade in old-line industrial stocks for tech stocks.

Union No

"While the recent carnage in stock prices and brouhaha over excessive options issuance has kept investor focus squarely on the incredible shrinking tech sector, folks may be looking in the rearview mirror when it comes to where risks lie today," Galbraith said. He points out that tech outfits rely on 401(k) plans rather than pensions, and unions are rare. "And we are not sure options will impact future tech cash flows as profoundly as pension funding and health care issues will impact traditionally cyclical, unionized companies," he said.

Not surprisingly, sectors with the greatest concentration of their workforces in unions -- transportation, communications/utilities, construction, durable goods and nondurable goods, according to Morgan Stanley research -- are also the groups with the biggest issues funding their pension plans.

In recent weeks, such problems have taken hold at


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, each of which has said it will have to contribute to underfunded pension plans.

A recent study by Credit Suisse First Boston estimates the aggregate pension plan for S&P 500 companies may be underfunded by as much as $241 billion at the end of 2002, the first time it will be underfunded since 1993.

When stock prices were soaring in the late 1990s, few firms worried about pension problems. During that time, 75% of S&P 500 companies had pension surpluses, according to a report by Fitch Ratings.

Now Galbraith is telling his clients that employee benefit problems will be overpowering in the current environment. "Yesterday's options problems in technology may be a lesser evil than tomorrow's pension and health care funding requirements in rust belt industries," he said in his report.

The idea does not go over so well with some experts. "If I were an equity holder, I would still be concerned about options too," said Christopher Struve, an analyst at Fitch Ratings.

Go Away, Norma Rae

On one point, the two analysts agree, however. In industries with large union representation, nonunion companies may stand out. So far, that's best illustrated by


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. Since its debut of trading in April, the carrier is up 21%, while the American Stock Exchange Airline Index is down 53%. "All else being equal, investing in a nonunionized company certainly makes sense," said Struve.

In an addendum to his report, Galbraith clarifies that he isn't antiunion -- he holds unionized companies in his portfolio. He also recognizes that union industries have likely underperformed the market, not only because they are unionized but also because they are in "brutally competitive" businesses.

"It is obviously still quite difficult out there," Galbraith said. "In such an environment, investors need to focus on companies with unit growth and share gain, as well as those with a high degree of cost flexibility and low debt."