Sectoral shift raises big questions

The agricultural revolution introduced by eighteenth-century British statesman Charles ‘Turnip’ Townshend may, at first glance, have no bearing at all on how advisers and clients can think about their portfolios and any tactical or strategic asset allocation decisions.

Townshend argued that crop rotation was a vital tool in the farmers’ toolkit when it came to maximising yields from the fields, with turnips and clover as two key elements of the plan. By the same token, advisers and clients need to be aware of the power of sector rotation within stock markets.

“Advisers and clients need to be aware of the power of sector rotation within stock markets.”


Even if the market will not always be right, its views must always be respected and shifts in performance momentum between the 39 industrial groupings will reflect wider thinking on the overall backdrop. Sometimes one sector’s fall from grace and another’s return to favour can be no more than a kneejerk reaction to a specific event. But when sectors that share similar characteristics start to do well (or badly) as a pack, that’s worthy of attention, especially if their momentum (positive or negative) represents a major change from prior trends.

At the moment, the UK – as benchmarked by the FTSE All-Share index – may just be showing such a shift, and possibly a collection of them. Whether this proves to be a major inflection point remains to be seen but the data does look interesting.

Subtle shift

The table gives advisers and clients the chance to judge the data for themselves. It shows the best and worst performing sectors within the FTSE All-Share index, on a quarterly basis, in 2019 to date.

Best and worst performing sectors within FTSE All-Share in 2019

Source: Refinitiv data. *To 28 October 2019

To this column’s eye, there is a clear difference between the type of sectors that did well (or badly) in the first two quarters of the year and those which have risen to the top of the pecking order (or sunk to the bottom) since summer came to an end. In general, we can conclude the following.

“Cyclical sectors that are sensitive to the global economy took charge in Q1 and to a lesser degree in Q2. […] Such sectors have since fallen from favour.”


  • Cyclical sectors that are sensitive to the global economy took charge in Q1 and to a lesser degree in Q2. This includes Industrial Metals & Mining, Mining and Industrial Engineering. Such sectors have since fallen from favour, with Autos & Parts and Industrial Metals & Mining down among the dead men in both Q3 and Q4.

  • “As a mirror image of the first trend, defensive sectors have started to work their way back into the market’s affections.”


  • As a mirror image of the first trend, defensive sectors have started to work their way back into the market’s affections. Healthcare and Pharmaceuticals both had a good Q3 and Electricity and Gas, Water & Multi-Utilities are ending 2019 with a flourish. This may reflect concerns over the UK economy, given its apparent pre-Brexit state of paralysis, as well as the slow rate of progress in the USA-China talks that are trying to resolve the trade dispute which seems to be weighing on global trade volumes. The utilities’ renaissance may surprise some given the promise of nationalisation offered by the opposition Labour Party, so it remains to be seen whether investors are underestimating the chance of Mr Corbyn and Mr McDonnell entering 10 and 11 Downing Street respectively.

  • “Even if we are still lacking clarity on Brexit, hopes for some kind of deal may be tempting some to take another look at downtrodden names and this can be seen in how ‘value’ stocks are rallying while ‘growth’ stocks are losing some momentum for the first time in a while.”


  • A number of serial underperformers from the first half are doing much better in the second. This, again, includes the utilities but also brings in Fixed Line Telecommunications, Life Insurers and sectors such as General Retailers, Real Estate Investment Trusts, Real Estate Investment & Services and Construction & Materials. Some of these groupings rely heavily on the UK economy for their bread and butter, so this could represent a move toward ‘value’ stocks. If that is too bold a call, it could at least mean investors are reappraising those domestically-focused sectors that have been out in the cold since the EU referendum vote of summer 2016. Even if we are still lacking clarity on Brexit, hopes for some kind of deal may be tempting some to take another look at downtrodden names and this can be seen in how ‘value’ stocks are rallying while ‘growth’ stocks are losing some momentum for the first time in a while.

  • ‘Value’ stocks are trying to forge a rally (again)

    Source: Refinitiv data

    Global angle

    Such a move from strategies based on ‘growth’, ‘momentum’ or ‘quality’ toward ‘value’ would be a huge change and have huge implications for asset allocation and fund and stock selection – if it persists. Value-disciples suffered false dawns in 2016 and late 2018, so they will not be getting carried away yet, although there are tentative signs that this is not just a UK phenomenon.

    “Value-disciples suffered false dawns in 2016 and late 2018, so they will not be getting carried away yet, although there are tentative signs that this is not just a UK phenomenon.”


    Global sector performance trends by quarter in 2019

    Source: Refinitiv data. *To 28 October 2019

    The sectors which make up the S&P Global 1200 show some similar trends, with cyclical/value plays like Banks doing better while ‘expensive defensives’ such as Consumer Staples are lagging. But Technology is still holding up well and Real Estate is making heavy weather of the fourth period of the year, so it is by no means a clean sweep for those who are awaiting a decisive shift from ‘growth’ to ‘value’. Watch this space.

    AJ Bell Investment Director

    Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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