Investing in a market index such as the Straits Times Index (STI) is a common strategy among retail investors who are not intending to pick out specific stocks.
The general idea is that instead of trying to pick up a few winning stocks, investors can invest in the market as a whole through an STI ETF, and to enjoy the average return provided by the market.
But besides just choosing to invest in individual stocks, or to invest in the market index as a whole, should investors consider just investing in specific sectors itself? More importantly, what kind of returns would they get compared to investing in the market index.
In 2016, the STI gave its investors a return of 4%, inclusive of dividends. In today’s article, we will look at 5 sectors that easily outperformed the STI in 2016.
# 1 Consumer Staples: + 25.9%
Top of the list is the consumer staples sector, which delivered a return of 25.9% for 2016 (based on year end market capitalisation). Big companies within the sector that did well included Wilmer International (+25%), Thai Beverage PCL (+27%) and Golden Agri-Resources (+28%).
Other top performing companies within the sector included JAPFA, which ended the year with a share price of $0.91 after starting at $0.46 (+91%), and Super Group (+54%), which was the target of a buyout offer in 2016.
# 2 Materials: + 17.9%
The material sector did well with CNMC Goldmine H being the star performer in the sector delivering a return of 128%.
This shouldn’t come as a surprise given that 2016 saw a strong surge in gold prices, which of course directly impact CNMC’s as a gold mining company. The company saw its share prices increase from $0.19 on 1 Jan 2016 to $0.44 by 31 Dec 2016.
Other companies in the material sector that did well in 2016 include UPP Holdings (+71%) and Kingboard Copper Foil (+45%).
# 3 Information Technology (IT): + 14.5%
The IT sector delivered a solid return of 14.5% for 2016. Top performing companies within the sector included TPV Technology (+79%), UMS Holdings (+31%) and Venture Corp (+28%).
While there were big companies such as IFast Corp and Silverlake Axis that didn’t perform as well, an investor who diversified well across the sector would still be able to enjoy good gains in 2016.
# 4 Consumer Discretionary: + 11.4%
Consumer discretionary stocks saw good returns among bigger companies including Jardine Cycle And Carriage (+21%), Genting Singapore (+21%) and Shangri La Asia (+17%).
# 5 Industrial: + 11.2%
Companies within the industrial sector saw mixed returns with big companies such as Jardine Matheson (+19%), Jardine Strategic (+25%) and SATS Ltd (+31%) performing way above their peers. At the same time, there were companies such as Comfort Delgro (-16%), Yangzijiang (-22%), Sembcorp Marine (-19%) and of course, Noble Group (-44%), who didn’t performed as well.
As a whole however, the sector gained 11.2%.
The Upside Of Sector Rotations Appears More Attractive
Unlike the effect of qualitative easing following the global financial crisis in 2008/2009, where stock markets as a whole increase (e.g. STI went up 23% in 2012), it appears that investing in the right sector these days is important if investors want a higher return that then market index.
However, hindsight is obviously 20/20 and without the presence of a crystal ball, it would be difficult to know which sector would perform well in 2017. The top performers for 2016 may not be the same for 2017.
One important observation is that investors have to be well diversified even if they choose to invest in specific sectors itself. For example, even among top performing sectors, there are stocks that performed well while others saw a decline in price.
So even if you are bullish on particular sector(s), it’s still important for you to ensure that you are well diversified within the sector itself.
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