Sunday, 2 September 2012

How are the market sectors working out this year?

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Monday will see the return to work of traders and maybe even some volume to the markets (well not quite Monday as the US is closed for the start of the NFL although they call it something else). Year to date it has been one of constant threat but little action, with the markets behaving like a hen=pecked husband to his wife. Eurocrisis, China Syndrome,  More QE, Less QE you name we have had it, and ye the market remain up on the year in the West, even if you can’t say that for the East. So what sectors have performed and where to look for the rest of the year, a continuation trend or reversal to a mean?

Interestingly some of the spreads across related industries are a nice dynamic. For example chemicals leads the way with mining and industrial metals the losers.  Clearly, if you are buying you products in more cheaply then the room for improving margin and pricing is there for Chemicals companies. With China on the slide and media commentary abounding that stocks of copper, iron and others are rapidly building in China’s ports, I doubt very much this will be a trend reversal candidate in 2012. Chemicals could well prove the winning sector come year end. 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 this year (nor the TSX or ASX if we look abroad).

More confusingly is the 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 split market, with seemingly cheaper purchases losing out and larger purchases holding on. 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 larger general retailers 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 does not exist.

A set of sectors set to continue there 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 stalwarts like Vodafone. 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 Construction. Every paper is full of demands for the Government to do something on construction and quite a few large announcements are due. Inaccurate ONS data has hindered the analysis of this sector too. A quick walk around the City of London soon shows how much development there can be, along with moves to boost housebuilding recently announced.

If your looking to trade short or long, the increasing correlations of movements by sector and across markets makes it well worth getting beyond micro-analysis and factoring in these wider trends into your stock picking analysis.

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