Performance not linked to rates

There is little proven correlation between interest rate cycles and relative sector performance, according to research from Standard Life Investments.

Ken Forman, global investment strategist at the group, said Standard Life has analysed UK interest rate cycles over the past 15 years, looking for consistency in sector behaviour. Over this period there were 10 turning points in the US market and nine in the UK.

In looking at a representative sample of 16 sectors drawn from across 10 categories for both markets, Standard Life analysed the performance of these relative to the overall stockmarket index for the three months before and three months after the turning point.

Forman said the UK market showed greater correlation than the US, with only one sector in the UK, telecom services, showing consistent underperformance ahead of a trough in interest rates, and outperforming following it.

Retailers were shown to reliably underperform either side of a trough and outperform before a peak, while utilities reliably outperformed prior to a peak and tech outperformed after a peak, according to Forman.

He said: 'This analysis provided some evidence of reliability but again not enough to be useful. The weak results in the study could well be because there are other factors, which are much more dominant than interest rates.

'When we looked at the sector and market effects last year, we found that stock specific factors were more important than either. Our latest work ties in with this.'

Investor sentiment is not always logical and Forman believes investors put more emphasis on stock specific factors than such macroeconomic characteristics as interest rates.

He also believes the diversity of companies that make up the broad categories of the FTSE World Index is one reason for the weak sector correlations and why they should only be used for guidance in stock selection. This is partly because of the lack of homogeneity in the sensitivities of the sector constituents.

If anything, the degree of homogeneity has reduced over time. Not only are there differences in the sensitivities of the companies in each sector, but the constituents are constantly in a state of flux, Forman said.

He added: 'Because we found a weak relationship between sector performance and the interest rate cycle, we expanded our investigation to look at the past 20 years from a global sector perspective.'

He found that the periods in which a sector outperforms tend to last for a few years and investors who rotate sector exposure too often are likely to miss out on big trend moves.

Forman said: 'We also investigated which categories performed best and worst in the UK, US, Europe ex UK and Japan. There was a lack of commonality with the overall world results, although it was closest in the US in the more recent periods.

'One particular feature stands out. Each market had IT as its best performing sector in the two periods covering September 1994 to March 2000. The surge in IT over those five and a half years was much greater than any of the other sector moves in the 20-year period.'

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