“One possible technique could be to look at which stock market sectors have done well and which have done badly, to see which areas could now be expensive or overstretched and which are downtrodden and potentially already pricing in a lot of bad news.
“After all, stock market history shows that a bad stock in a good sector will tend to outperform a good stock in a bad sector.
“One quick measure of global sector performance is the S&P 1200 index, which is priced in dollars, and its 11 major constituent groupings.
“As can be clearly seen, certain sectors have done well since 2008 – when the Great Financial Crisis was starting to brew – and over the past year too.
“As such, Technology, consumer stocks (especially expensive defensives such as Consumer Staples, like Beverages, Personal Goods and Household Goods, where investors may be mistaking quality of earnings for safety of share price) and Healthcare (or at least the biotechnology element) could be hard hit if investors take fright and look to lock in profits.
S&P Global 1200 performance, in dollars | |||
| Last 10 years |
| Last year |
Technology | 184.3% | Technology | 34.0% |
Consumer Discretionary | 129.2% | Consumer Discretionary | 22.7% |
Healthcare | 110.0% | Industrials | 18.9% |
Consumer Staples | 79.7% | Financials | 18.7% |
Industrials | 60.6% | Materials | 18.2% |
S&P Global 1200 | 47.8% | S&P Global 1200 | 17.4% |
Real Estate | 34.3% | Healthcare | 15.1% |
Financials | 1.5% | Consumer Staples | 8.2% |
Materials | -1.9% | Real Estate | 3.7% |
Telecoms | -8.5% | Utilities | 3.5% |
Energy | -15.1% | Energy | 1.9% |
Utilities | -23.7% | Telecoms | -0.9% |
Source: Thomson Reuters Datastream, to 6 February 2018
“The tricky bit is finding a haven as the worst performers of the last 10 years all lack one of the most fundamental features of any solid investment – pricing power.
“Mining is inherently a cyclical business and Telecoms is being hollowed out by competition from multiple sources. Meanwhile, oil is a commodity that faces technological challenges of its own, as shale drives American output ever higher while utilities are under regulatory pressure and could struggle if interest rates do go higher, given their ‘bond proxy’ status and the risk that higher returns on cash suck cash away from income-generating sectors if investors really do start to seek safety.
“Of these, perhaps oil is the one to watch. In the UK, Shell and BP have both cut costs and sought to invest more prudently, so that their dividends are again covered by cash flow, providing patient investors with yields in excess of 5%. Better still, they have been able to do this while oil averaged less than $55 a barrel in 2017 – whereas 10 years ago it was trading at $88 (and going to $147 before a slump down to $33 in late 2008.)
“This isn’t to say the oils would be immune from fresh market decline but they could offer some relative safety (and yield).
“The other solution is to avoid trying to time markets at all. This avoids incurring stamp duty, spreads, broker commissions and possibly tax and the danger of getting two decisions wrong, not just one (what to sell and then what to buy). The secret then is to ensure that a portfolio is designed to meet an investors’ overall strategy, time horizon, target returns and above all their appetite for risk – which is best defined as the ability and willingness to withstand near-term losses in the pursuit of long-term gains.”