Sector performance trends suggest investors in UK stocks are getting nervous
UK investors are focusing on value and safer, stodgier sectors
Financials falling out of favour
“There is an old saying that ‘a bad stock in a good sector will tend to outperform a good stock in a bad sector,’ and identifying which industrial groupings may be best placed to do well at a given time in the economic or market cycle can cut down on the amount of research needed when it comes to picking portfolio winners and dodging potential duds,” says Russ Mould, AJ Bell investment director.
“Two clear trends therefore jump right out from our analysis of the second-quarter performance trends among the 39 industrial sector indices which then make up the headline FTSE All-Share benchmark.
A switch to value and safer, stodgier sectors
“Cyclical sectors and turnaround plays did best in the first three months of the year, while some groupings also got a boost from takeover activity (most notably Automotive and Parts, as GKN fought in vain to stave off a bid from Melrose Resources). Mining, Industrial Transportation, Chemicals, General Industrials and Forestry & Paper were all the fore.
“Yet the picture was quite different in Q2, even if takeover talk kept Forestry & Paper in the headlines. Defensive or perceived ‘value’ areas like Oil & Gas Producers, Food Producers, Aerospace & Defence and Beverages did best, while the return to favour of Support Services owed much to the consistency of earnings and dividends at Compass and Bunzl, despite the headlines made by other sector members, such as Carillion.
Best-performing FTSE All-Share sectors (capital return only) in 2018 | |||||
| Q1 |
| Q2 | ||
1 | Automobiles & Parts | 42.7% |
| Food & Drug Retailers | 29.3% |
2 | Technology Hardware | 31.2% |
| Oil & Gas Producers | 17.7% |
3 | Industrial Metals & Mining | 8.8% |
| Oil Equipment & Services | 14.8% |
4 | Industrial Transportation | 3.1% |
| Support Services | 14.3% |
5 | Chemicals | 2.8% |
| Software & Comp. Services | 13.7% |
6 | Health Care Equip. & Services | 2.7% |
| Food Producers | 12.6% |
7 | General Industrials | 0.8% |
| Media | 12.6% |
8 | Aerospace & Defence | 0.8% |
| Aerospace & Defence | 12.0% |
9 | Forestry & Paper | (0.1%) |
| Forestry & Paper | 10.7% |
10 | Food & Drug Retailers | (0.9%) |
| Beverages | 10.7% |
| FTSE All-Share | (7.3%) |
| FTSE All-Share | 6.7% |
Source: Thomson Reuters Datastream
A loss of faith in financials
“In the first quarter, investors shunned defensives such as Beverages, Utilities, Telecoms and Tobacco as they bought into the prevailing narrative of a globally synchronised recovery.
“Some of these sectors remained in the doghouse in the second quarter as issues such as the cost of 5G network roll-out weighed on telecoms, and regulation and doubts over next generation volumes held back Tobacco.
“But the loss of faith in financials is quite noticeable. Life Insurance and Banks plunged into the list of the ten worst performers for the second quarter, while house builders and real estate plays also did badly.
“Anyone who remembers the 2007-09 Financial crisis and bear market will recall that financials lay at the heart of that and a spell of poor performance from them was a precursor and early warning signal of trouble ahead.
Worst-performing FTSE All-Share sectors (capital return only) in 2018 | |||||
| Q1 |
| Q2 | ||
1 | Mining | (8.8%) |
| Household Goods & Home Construction | 0.5% |
2 | Leisure Goods | (10.0%) |
| Banks | 0.3% |
3 | Oil Equipment & Services | (10.5%) |
| Technology Hardware | 0.0% |
4 | General Retailers | (10.8%) |
| Health Care Equip & Services | (0.7%) |
5 | Household Goods & Home Construction | (11.9%) |
| Automobiles & Parts | (1.4%) |
6 | Food Producers | (15.1%) |
| Industrial Transportation | (2.1%) |
7 | Fixed Line Telecoms | (16.5%) |
| Life Insurance | (2.7%) |
8 | Mobile Telecoms | (17.3%) |
| Tobacco | (2.8%) |
9 | Tobacco | (17.8%) |
| Mobile Telecoms | (4.2%) |
10 | Software & Comp. Services | (29.6%) |
| Fixed Line Telecoms | (4.8%) |
| FTSE All-Share | (7.3%) |
| FTSE All-Share | 6.7% |
Source: Thomson Reuters Datastream
Relative rankings
“An analysis of the 39 sectors’ individual performance ranking is even more telling, based on a mechanism whereby the sector which does best is ranked one and the worst is ranked 39.
“The fastest gainers (on a relative basis, within their peers) offer yield, or some degree of value or defensive safety, with even the much-maligned political punch-bag that is Gas, Water and Multi-Utilities shooting up the leader board (from a dismal 33rd place at the end of March to a less dismal 21st come the end of June).
FTSE All-Share sectors in Q2 2018: best relative and worst relative sectors by performance ranking | ||||
|
|
|
|
|
Places gained | Sector |
| Places lost |
|
17 | Oil & Gas Producers |
| (11) | Financial Services |
15 | Support Services |
| (13) | Healthcare Equipment |
12 | Oil Equipment & Services |
| (14) | Non-life insurance |
12 | Personal Goods |
| (15) | Industrial Transportation |
12 | Gas, Water & Multi-Utilities |
| (20) | Life Insurance |
Source: Thomson Reuters Datastream
“As such investors may need to be on alert.
“These trends could be the result of nothing more than the usual summertime snooze ahead of St. Leger day in September or the result of President Trump’s blustering over tariffs, oil prices and global geopolitical relations.
“Equally, they could reflect gathering concern over global growth, especially as a strong dollar, firm oil prices, flattening yield curve and widening credit spreads can be a warning sign, especially at a time when the US Federal Reserve seems determined to raise interest rates and withdraw more Quantitative Easing, depriving stock markets of (some of) the cheap money upon which they have feasted since 2009.”