The above table shows that four sectors outperformed the benchmark: Consumer Discretionary*, Information Technology, Telecommunicationsand Health Care; these same sectors were also among the favourites at the beginning of the year.
Would an investment policy based on a sectoral approach provide the key to a fair allocation of capital? To answer this question, let us look at the cases where this is justified as well as the counter-examples.
The Healthcaresector is among the best performing sectors, as it enjoys a higher demand for its products, focusing hopes for new therapies or a vaccine. This sector would provide a yes answer to the above question.
But then how can we explain that, in a period of economic crisis, we must rely on Consumer Discretionaryto make profits? Indeed, what is discretionary is what is not essential, what is sacrificed first in the event of a recession.
The explanation can be found in the content of the sectors.
In the “Discretionary” sector we find Amazon; a stock long cherished by investors, it has also benefited from the lockdown periods as online purchases were high in demand.
The second part of the explanation lies in the weight that Amazon represents in the index. Amazon alone accounts for more than 4% of the S&P500, but above all 40% of the Discretionary Sector. It’s a bit like the tree that hides the forest. In this same sector, 80% of the companies show a negative performance, of -15% on average.
In the same vein, don’t look for MasterCard, Visa or PayPal in the Financials sector, they are in the IT sector because their profits are more about the data they collect about their customers rather than the margins on transactions.
Since the S&P500 is a market capitalization-weighted index of each company, in the end only a small number of large capitalizations made the performance of the index.
In conclusion, the sector approach does not work, at least for the time being. A thematic approach and rigorous “stock-picking” are to be preferred.
It is possible to sum up what we have been through by pursuing the themes that were already in favour at the beginning of the year, namely those of technology in a trading world dominated by a few global players. To this was added the theme of health, whether curative or preventive, to explain the overall performance.
These themes should endure because the fundamentals that were present are reinforced by health imperatives that will last for a long time to come.