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Tech cracks, Eastern promise [Sector review]

An extract from the July 2019 edition of the TopFunds Guide

Posted by: Sam Lees
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It has been a good first half of the year with some very strong performances. This is a sharp turnaround from the second half of 2018, when the majority of sector averages were negative.

None of the sector averages are negative since January 2019. North America and Technology are the best performers while bond sectors, Absolute Return and direct property dominate the bottom
 
We are coming to the end of a huge experiment that started in 2008 when central bankers started buying government bonds, corporate bonds (in some cases) and equities (such as in Japan) in massive scale.
 
The US market is as overvalued as it was in 1929 (on some measures more so). The quantity and quality of global debt has never been worse. Trade tensions, political uncertainty, high debt levels, muted growth expectations and faltering corporate spending are all concerning.
 
Yet there were good profits to be had in the last 6 months for the brave. 
 
Tech titans & US focus
 
North America, North American Smaller Companies and Technology & Telecoms cluster at the top of the table. Along with the Global sector, whose funds tend to have a large exposure to US companies, they occupy the top 4 spots. Big tech companies have done well but cracks are showing. Limited appetite for the recent listings by loss-making companies like Lyft and Uber should give investors pause for thought.
 
Revolting Europe
 
It has also been a good six months for the two European sectors, up 13.87% and 14.47%. However, muted growth prospects and a failure to address the concerns of the electorate, resulted in a good showing for Eurosceptic parties in the May elections. This lack of confidence is not the stuff of a sustainable uptrend - deep-seated problems remain - divisions within EU, debt, and demographics.
 
Dependence on exports still presents a challenge, but some respite for big exporters like Germany may come from Chinese stimulus, Trump allowing.
 
Weathering the storm
 
China, Global Emerging Markets and Asia Pacific ex-Japan all sit mid-table. In the short term the Asian markets are somewhat cheaper than in the West, plus there is greater longer-term potential, as we covered in the last two editions.
 
Brexit potential ahead?
 
The three main UK equity sectors have had a decent six months, in spite of the Brexit cloud. There are some attractive opportunities here, particularly compared to expensive stock markets like the US. Certainty around Brexit could encourage investment by both individuals and institutions currently keeping their powder dry. Though whether this could be sustained will be dictated by action in the US markets.
 
Absolute Return horror
 
The Targeted Absolute Return sector was struck by a fund closure in March, as City Financial went into administration and shut their Absolute Equity fund. 
 
This is supposed to be a lower risk sector, but the difference between best and worst funds shown in the table tells a different story - the worst fund is down 38%!
 
Bright EM Bonds
 
Global Emerging Market Bonds took the top spot last time around. The average return of 8.32% in the last six months is impressive and broad-based – the sector has the smallest differential between top and bottoms funds of all those shown. Be wary of weakness as the US dollar responds to various events in the second half.
 
FURTHER READING

 

What''s Hot? What's Not?

 
Sector Performance 6 Months % Best fund % Worst fund % Difference (Best-Worst) %
North American Smaller Companies 20.59 26.26 12.71 13.55
Technology & Telecommunications 17.98 24.96 4.49 20.47
North America 17.88 26.71 10.14 16.57
Global 15.11 28.00 -0.24 28.24
European Smaller Companies 14.47 24.72 3.02 21.70
Europe Excluding UK 13.87 23.48 2.19 21.29
Global Equity Income 13.16 22.62 5.12 17.50
UK Smaller Companies 12.81 31.38 -4.39 35.77
Property Other 12.45 20.96 -2.42 23.38
UK All Companies 11.83 23.49 -11.95 35.44
China/Greater China 10.43 19.76 3.37 16.39
Global Emerging Markets 9.83 17.40 3.25 14.15
UK Equity Income 9.30 16.10 -12.36 28.46
Asia Pacific Excluding Japan 9.26 15.74 3.84 11.90
UK Index Linked Gilts 9.23 10.97 2.52 8.45
Specialist 8.55 25.29 -23.75 49.04
Global Emerging Markets Bond 8.32 10.96 6.74 4.22
Japan 7.77 17.57 -4.00 21.57
Sterling High Yield 6.47 8.39 3.86 4.53
Japanese Smaller Companies 6.40 11.95 -0.96 12.91
Sterling Corporate Bond 5.93 11.52 1.52 10.00
UK Gilts 5.73 9.91 0.73 9.18
Sterling Strategic Bond 5.17 11.97 -17.17 29.14
Global Bonds 4.73 9.09 -0.04 9.13
Targeted Absolute Return 1.98 10.04 -38.29 48.33
UK Direct Property 0.53 4.23 -5.06 9.29
 
Performance data: 01/01/2019-17/06/2019
Topic: Sector analysis


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