There’s a typically fearless comment in Warren Buffett’s latest letter to Berkshire Hathaway shareholders, where he says:
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”
Buffett was referring to the sorts of buying opportunities that come up when markets face turmoil. Seismic setbacks in 2000-02 and 2008 are classic examples - but they’re not the only ones.
Last year’s decision by the UK to leave the EU now looks like a pothole for equity prices rather than the type of collapse triggered by a dotcom crash or financial crisis. Even so, the Brexit vote did cause unsettled economic weather which boosted some sectors and battered others.
Specifically, there was an acceleration in the performance of some shares that tend to move in sync with the economy - like cyclicals, sensitives and basic materials. On the flip-side, high yielding defensives lost ground.
With Brexit negotiations set to kick off after March 29, the economic uncertainty continues - but trends suggest that some sectors remain more attractive than others in these conditions. A simple way to see this is through the lens of the StockRanks.
Using StockRanks to find sector trends
StockRanks are a framework for assessing shares against three factors that have historically driven investment outperformance - Quality, Value and Momentum (QVM). Evidence shows that shares in good quality companies that are cheaply priced and have improving price and earnings strength, have a higher probability of performing well.
Over the past four years, a regularly refreshed basket of stocks in the top 10% of the market based on their combined QVM have strongly outperformed. Right now, a look at the top 10% basket (with a minimum market cap of £10m) suggests that cyclical and sensitive sectors offer a strong source of exposure to these factors. You can see this on the High StockRanks and Sectors screen here.
Metals - miners are digging in
2016 was a vastly better year for mining stocks after a prolonged spell out of favour. It was especially promising for those exposed to copper, gold and silver (metals which all rose in price). Anglo American was one of the best performers in the sector. With a StockRank of 99 it’s also one of the…
