Investing Comment |
|
Your Money > Investing Comment Articles > Forward defensive?
|
By Richard Hunter, Hargreaves Lansdown
Given the current debate as to whether markets have risen “too far, too fast” since their lows in March – some 46%, for example, in the case of the FTSE100 – which sectors have actually been performing during 2009 and what does this say about investors' behaviour and outlook? There is currently a great deal of “rotation” occurring between defensive and cyclical sectors, which clearly show differing views. Firstly, though, it may be worthwhile to consider the merits and differences of so-called “defensive” and “cyclical” shares. Defensive shares are best described as being industries which are largely unaffected by different parts of the economic cycle, because they provide certain services. For example, the utility companies are classically defensive shares. Whatever the state of the economy, we all continue to need water, electricity and gas. This is not to say that defensive shares will not suffer at all in a prolonged downturn, so much as they will suffer less than their cyclical counterparts. Other sectors, however, are more cyclical by nature, and their fortunes will change as time goes on. For example, at certain times during the economy, the makers of luxury goods and certain retailers will benefit from the consumers' feel good factor. Similarly, when things turn tough, so can the performance of these companies' shares. The different seasons of the year can also result in a company having busy and quiet periods. In essence, these companies benefit during times of economic growth and then decline during recession. The accepted wisdom is that if consumer spending starts to flag, the first sectors which will be hit are likely to be the retailers, housebuilders, motor distributors and then other companies which deal directly with consumers. This then tends to feed through to those companies which supply the goods and services to the High Street, who in turn trim their own capital investment and purchase of raw materials. Equally importantly – the same is true in reverse, and the “early” cyclical stocks tend to move first. This is interesting in light of the below sectors' movements. Aside from this, professional investors, naturally, have their own agenda here. The generally accepted wisdom is to go “underweight” on cyclical shares in anticipation of a recession and then “overweight” as it bottoms out. Since most in the market have a similar strategy, share prices are at any time anticipating these economic changes long before they actually happen. Turning to the movements of certain sectors during 2009, these trends do seem to be borne out. By way of comparison, the FTSE100 itself is currently up 17% in the year to date For example, classically defensive sectors have put in the following performances – gas, water and multi-utilities down 9%, utilities down 6.5% and healthcare down 2%. In what appears to be a strong anticipation of recovery, the following sectors are random examples of those which have outperformed – industrial metals up 372%, technology hardware up 108%, leisure goods up 88% and general retailers up 65% (Source – ShareScope). It would therefore appear that the market is already factoring in a strong recovery in the UK economy – although investors should be aware that any disappointing outcome other than this could well see a reversal of these sectors' fortunes. The debate about whether the market is currently due for a correction is one which is mirrored in the movement between defensives and cyclicals by professional investors. Private investors should therefore remain vigilant and ready to move quickly in the shorter term. Richard J Hunter is Head of UK Equities at Hargreaves Lansdown Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||