Sector Rotation

Use Styles RouteMap to maximise profits and minimise risk throughout the stock market cycle

 

 

 

 

 

 

The chain of events radiates outwards from the centre of the concentric rings

Events move clockwise round the rings

Sector and Style Investing

The Styles RouteMap analyses nine different investment themes covering the most important investing styles and market sectors for United States, Japan, United Kingdom, the Euro-Zone, Europe and Global investment mandates. These are arranged in order of typical sector rotation in a classic stock market cycle, as shown below.

Which economic sectors and investing styles to favour at different stages of the investment cycle

 

 

 

 

Investment Cycles

In the classic investment cycle different types of asset rotate in and out of fashion as the economic cycle progresses. This is reflected within the stock market in clockwise order as shown in the image above, in response to the various stages the profits of each kind of company are most likely to outperform. The Styles RouteMap provides several ways to help users maximise returns by exploiting this rotational phenomenon. 

  • The Key Economic Indicator chart type shows the economic variable that best explains the fundamental performance of each style or sector. It also includes a Best Guess for the next one or two years, based on our econometric models
  • The Slide Show is programmed to run through the styles and sectors in the order shown rotating clockwise in the image above, i.e. Real Estate > Financial > Health Care > Growth > Value > SmallCaps > Technology > Resources > Gold

However reality is more complex than in such classic stock market cycles. In particular: -

  • In some regions economic cycles are typically export-led. In such cases capital goods sectors, such as Technology, will typically lead the market, rather than lagging as in the classic cycle.
  • Devaluations often suddenly upset cycles, such that there is a sharp transition from sectors that are interest rate sensitive to those that are economically sensitive. This has frequently been the case for the United Kingdom.
  • Secular trends can over-ride cycles - most dramatically for Resources, which peaked in 1980 and Technology in 2000.

 


Sectors and styles are chosen to maximise divergence in the Styles RouteMap

       
  Correlation with S&P 500  
  20 Years  
       
  Growth 0.81  
  Value 0.79  
  SmallCap 0.71  
  Finance 0.69  
  Technology 0.67  
  Resources 0.56  
  Health Care 0.54  
  Real Estate 0.51  
  Gold 0.26  
       
Sector Selection

Our choice of sectors is designed to maximise returns by exploiting systematic divergences in performance characteristics. Our selection is driven by low correlation with market averages and with one another. It is no co-incidence that this selection mirrors the most widespread specialist sector funds, as both are intended for profit-maximisation rather than risk-minimisation. We make no pretence at adopting a full   industrial classification as used by benchmark index publishers, since comprehensive coverage is not required for our purposes.

The table alongside shows the correlation for monthly returns of selected sectors with the STOXX Europe index, which is shown as an example typical of other regional benchmark indexes. The sectors researched in the Style RouteMap are shown in bold black type.

All the main economic sectors are shown against a grey background. Additional specialist sub-sectors are shown against a white background.  As can be seen, the correlations for these are comparatively low. * We have combined Mining Metals and Energy into a Resources sector and include South African Gold for completeness.

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Next Class

Sector Rotation is part of the free international investment seminar. Just follow the classroom signs alongside. At the end of each class, there is a sign to the beginning of the Next Class. You can join the classes at any stage, but logically, it is best to start at the top of this page which is the beginning of the series.