Sectoral disparities abound so far throughout 2012

3 mins. to read

Tomorrow will see the return to work of many traders and fund managers who have no doubt been escaping the miserable British summer and volume should return to the markets.

The year to date has been one of constant threats of implosion from Euro-land and relatively little action, save for the usual skirting around the edges by the politicans. It seems to be a never ending merry go round of Eurocrisis, China Syndrome, more QE, less QE… you name we’ve had it and yet, markets in the West remain up on the year. The outliers being peripheral/southern Europe and China also in particular. So, what sectors have performed well and where should we look for the rest of the year for returns?

Interestingly, there is some disparity of the relative performance spreads across related industries. For example in the Commodity sphere, chemicals lead the way and yet mining and industrial metals are net negative on the year.  Clearly, if you are buying your raw materials in more cheaply then there is room for improving margin and pricing, hence the outperformance by Chemicals companies. With China on the slide and media commentary abounding that stocks of copper, iron ore and others are rapidly building in China’s ports, I doubt very much that this will be a trend reversal candidate in 2012. Chemicals could very well prove to be the winning sector come year end with an extension of the outperformance trend. Sadly for AIM, mining and precious metals mining are huge chunks of the listed market and so this does not bode well for the AIM market for the balance of this year (nor the TSX or ASX if we look abroad).

More confusingly is the various Retail sectors. Leisure goods (see JJB this very week, dying for the 3rd time in 2 years with severe doubts anyone will even try a pre-pack – yet again!), Food Retail and Personal Goods are down, whilst General Retailers and Household Goods have performed much better. It’s a difficult market to call, but I can’t see any retail sector recovering this year as the demand shy consumers grind through the recession. If anything, the most likely scenario is that the larger General Retailers (like Next) may fall back a bit as the recession continues.

Financials generally, including insurance, have had a dull year and with constant scandals and the Eurozone crisis coming to the boil, this remains a sector to avoid with limited upside short of some miraculous solution in Europe which, I feel, does not exist.

A set of sectors set to continue their strong run is the Technology, Media and Telecoms sectors. Even Danny Boyle at the Olympics opening ceremony could see how mobile networking is driving a new revolution and the UK listings in this area have a number of decent takeover targets as well as” utility” like stalwarts like Vodafone remaining attractive. Even BT has done a good deal on the Premier League rights – there must be something good in the water for sure!

The obvious stand out to change will be, in my opinion, Construction. Every paper is full of demands for the Government to do something with the Construction sector and quite a few large policy announcements are due. Inaccurate ONS data has hindered the analysis of this sector I believe. A quick walk around the City of London soon shows how much development there can be, along with the moves to boost house-building recently announced. Steve Morgan’s takeover over Redrow illustrates the inherent value here.

Whether you’re looking to trade short or long, the increasing correlations of movements by sector and across markets, makes it well worth going beyond micro-analysis and factor in these wider macro trends into your stock picking analysis.


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