Which equity sectors are hot (and cold) as the markets head into summer?

Global equity markets appear to be regathering a little of their poise, as hopes gather that fresh talks between the US and China will avoid war without the shooting, and an escalation in tariffs, and that the marked absence of a Russian response to Western intervention in a war with the shooting in Syria means this conflict will not spiral into a wider conflagration either.

This can be seen in how stock markets are performing by sector, as benchmarked by the 11 segments which comprise the S&P Global 1200 index.

Technology and consumer discretionary stocks still lead the way globally in 2018, with real estate and consumer staples the laggards

Source: Thomson Reuters Datastream

Technology is trying to shake off the April wobble that followed the latest Tesla production disappointment, the Cambridge Analytica scandal that continues to dog Facebook and chatter that sales of Apple’s iPhone X are not all that they could be.

Consumer Discretionary appears to be riding a wave of optimism that a truly globally synchronised recovery is upon us, further buoyed by an acceleration in wage growth in the UK and USA, for example, even if Japan still looks to be falling short of the 3% increase laid down as a target for the spring pay round by Prime Minister Shinzō Abe.

Wage growth does look to be finally accelerating in the USA and UK

Source: ONS, Fred - St. Louis Federal Reserve database, US Bureau of Labor Statistics

Notable laggards include the bond proxy sector Utilities, which is generally seen as a likely underperformer as central banks jack up interest rates and drag bond yields with them, as the improved returns here lessen appetite for gas, water and electricity companies’ plump dividends, at least on a relative basis.

Real estate also remains in the doldrums as advisers, clients and fund managers continue to fret about the impact of online disruption on retail landlords and shopping centre and mall owners in particular.

And yet the picture may not be quite so clear once advisers and clients dig a little deeper and three trends in particular bear closer inspection.

Three trends to watch

Three themes which emerge from this year’s S&P Global 1200 sector performance trends may be worth following, not least as they do not necessarily sit easily with the prevailing narrative of a global recovery, gathering inflation and more hawkish central bank policy in the form of higher interest rates and less Quantitative Easing (QE).

  • Utilities enjoyed a relative renaissance in April, falling a lot less than than their peers, to illustrate that any wider market wobble or fresh outbreak of growth fears could still bring this sector into fashion. This next graphic shows Utilities’ weekly performance ranking for 2018, with one the best and 11 the worst.

Utilities showed some resilience during the April growth and tech stock stumble

Source: Thomson Reuters Datastream

  • Consumer Staples and Healthcare have both lost momentum badly in 2018. Consumer Staples stocks are down 7.5% for the year, as tobacco stocks in particular have fallen from favour, with Philip Morris’ warning about ‘vaping’ and cigarette alternative sales in Japan in the first quarter prompting particular angst. Healthcare has also lagged, with a minor fall, despite (or because of?) rampant merger and acquisition activity in the sector.

One or two disappointing drug trials have not helped sentiment in Healthcare but perhaps the issue with Consumer Staples and Healthcare is as much one of valuation as anything else. It is possible that a long run of good performance means they are simply ‘expensive defensives’ and have become areas where advisers and clients must be careful not to equate quality of earnings with safety. A sector that is popular and expensive can do just as much damage in the long term as one that is serving up earnings disappointments in the near term.

Consumer Staples and Healthcare have slipped down the S&P Global 1200 performance rankings in 2018

Source: Thomson Reuters Datastream

The other gainer of note is Energy. Oil’s rise to nearly $75 a barrel is a key factor here, whether this is the result of OPEC’s supply-side discipline, concerns that America’s hawkish stance on Iran could lead to sanctions that once more block Tehran’s access to global markets, or wider unrest in the Middle East. Yet the oil firms have also helped themselves, by cutting costs, pruning capital expenditure and selling non-core assets, all moves which have helped to preserve the dividends that are cherished by income-seeking advisers and clients.

Energy has crept stealthily up the performance S&P Global 1200 rankings in 2018

Source: Thomson Reuters Datastream

Energy’s rise this year is all the more interesting given its terrible run since 2012, as the sector has been the worst or second-worst performer for every year but once since then. Perhaps, in contrast to Consumer Staples and Healthcare, expectations, and therefore valuations are low, and earnings forecasts sufficiently cautious for them to exceed with relative ease rather than great difficulty.

Energy is trying to shake off a turgid run of performance over the last six years

Source: Thomson Reuters Datastream

Advisers and clients are unlikely to have the time or inclination to dig into the minutiae of stock specifics, but all of these trends should be worth bearing in mind when the picks and asset allocation strategies of their preferred fund managers are analysed, for collectives which take a sector or a geographic approach.

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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