When you buy stocks in sectors and sub-sectors of the market, keep your portfolio balance goals in mind. If you’re a conservative, income-seeking investor, focus on utilities, financial and consumer stocks. If you’re aggressive, buy more manufacturing and resource stocks.
As a general rule, we advise you to keep at least 10 per cent—but no more than 30 per cent—of your equity portfolio in each of the five main economic sectors. Remember, too, that within any given sector or sub-sector, individual stocks will perform differently from one another.
Here’s our market outlook for the next six to twelve months for the five main sectors and their sub-sectors. Our long-run outlooks can differ from our short-run outlooks.
We still expect the bank stocks to beat the market. Interest rates are creeping up, they’re expanding, cutting costs and pay high, growing, dividends. We expect mutual funds to lag due to competition from the banks and exchange-traded funds plus more disclosure of fees. We still expect insurance stocks to outperform due to rising interest rates and fast growth abroad.
Utilities mostly pay high and rising dividends. We expect gas and electricity utilities to match the market as interest rates rise. We expect pipeline stocks to outperform the market since U.S. President Donald Trump favors new ones. We still expect the cozy oligopoly of telephone stocks to beat the market.
We still expect building materials stocks to match the market as construction and renovation proceed. We expect chemical stocks to match as they merge and cut costs. Fabricating stocks and engineering stocks should outperform the market as North American governments invest in infrastructure. Steel-related stocks should lag due to low prices as China dumps excess output. Technology stocks should outperform as firms invest to cut costs. We now expect transportation stocks to match the market. Protectionism will reduce the movement of goods internationally, but the North American economy is growing.
We expect traditional communications stocks to lag, but not those that serve online advertisers. We now expect food, beverage and tobacco stocks to match the market as more investors seek dividends and safety. Canada’s drugstores and small healthcare stocks should lag due to government regulations, lower drug prices and generic drugs. We expect surviving merchandising stocks to match the market as competitors fail. But online sales by say, Amazon, are a threat.
We expect gold stocks to outperform the market due to higher prices and rationalized operations, and oil and gas stocks to outperform due to higher prices, better prospects for pipelines and a resumption of investment. Other mining stocks should match the market though China will buy less base metals as international trade stalls. Still, most metals prices are higher. Forestry stocks should lag, due to U.S. duties. This is partly offset by brisk construction.
It’s best to diversify across the five main sectors of the economy: finance, utilities, consumer, manufacturing and resources. Each of these broad sectors is made up of sub-sectors that often have different outlooks.
Remember, though, there’s danger in loading up on stocks in sectors that we expect to beat the market. That’s because investors often bid up the prices of such stocks, making them vulnerable in market setbacks. Stocks in sectors that we expect to underperform, by contrast, often trade at bargain levels. Besides, predictions—including ours—are susceptible to errors. So make sure you own some stocks even in sectors that we expect to lag the market.
This is an edited version of an article that was originally published for subscribers in the June 2, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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