Looking at the performance of the financial markets could be a useful first approach to get an overall overview of how the market is going, however it would only be a partial overview. To have a more complete point of view, it may be useful to break down the performance data, observing it on the basis of the results produced by the various sectors that make up a stock index.
We have therefore decided to examine one of the main world stock indices, theMSCI World. Since the beginning of the year, this has grown by about 6% (in Euros), a positive result, the result of the positive dynamics of which sectors?
Who is doing better in the stock market?
Financial, technological and energy. These are the three most important sectors (by weight) for the global equity market represented by this index. Nothing new then: the technological sector is the undisputed king of growth in recent years, oil pushes the energy sector thanks to the positive effects of OPEC's choices and the turbulence in Iran and Venezuela; the financial sector is declining and, year after year since the 2008 crisis, has lost importance.
Not just performance: what do evaluations tell us?
However, performance alone may not be enough to understand the health of a market. Let's therefore broaden the analysis by also observing the trend in valuations, trying to understand from the numbers that emerge from the financial statements of companies whether there is some danger of a speculative bubble behind a good performance, or whether some opportunity emerges behind a negative result. To do this, we compare two different and complementary indicators: the factor momentum, concerning performance, and the value factor, which looks at the fundamental balance sheet values.
How are global sectors at the halfway point of 2018?
Let's read the graph together. Most of the sectors are found in the right-hand quadrants of the graph: this indicates that the valuations derived from the financial statements identify sectors that are a little more expensive than their historical averages. Conversely, on the left we find the sectors considered "at a discount", given that the valuations are negative. Opposed to the value factor, the momentum is decidedly more heterogeneous: some sectors (primarily technology and energy) have an excellent momentum, however, the telecommunications and durable goods sector did badly.
A complementary reading: cyclical vs defensive
There is one aspect which is particularly interesting to underline: if we observe the sectors according to the breakdown between those considered as cyclical, highly correlated with the trend of the economic cycle, and the defensive, which instead are less affected by the surrounding economic environment, we note a significant polarization between the two groups. Cyclicals (tech, materials, industrials, financials and consumer) are high valuations and high factor momentum: these are very mature sectors, which are running in short. On the contrary, the defensive ones (health, utilities, durable goods, energy and telecommunications) appear to have valuations more in line with the historical average and one factor momentum decidedly weak: sectors that we could define as still a little immature.
External factors have their influence
Undoubtedly the rush of the price lists in recent years has contributed to raising the valuations, which in any case are justified by the still excellent results published in the last quarterly reports. Furthermore, the sub-zero cost of money in Europe and slowly rising in the United States, has provided a further boost to the equity markets, allowing companies to refinance their debt (at lower costs) or access convenient forms of financing.
The (almost) clear separation between cyclical and defensive requires us to carefully monitor the performance of the markets and their reaction to one of the many variables (rate hikes, tax reforms, etc...) that can bring entropy within of a complex system such as that of the markets.
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