As part of our study into the history of bear markets (see ), we've looked at the performance of every UK sector since the onset of the current bear market at the start of August last year. The results are shown in the table below the advert. We also looked at the performance of various sectors in every bear market or correction since 1965.
Over time, all sectors have lost money on average during bear markets. That's not to say that every sector has lost money during every bear market. Certain individual sectors can do very well during particular bear phases. For example, tobacco achieved positive annualised absolute returns of 21.4 per cent during the long and savage bear market of 2000-03.
SECTOR PERFORMANCE, 31 JUL 2007 - 25 JAN 2008
| Sector | Perf. vs All-shr | Abs. perf | Rel. perf., annualised % | Abs. perf., annualised % | out/underperform % |
|---|---|---|---|---|---|
| Electricity | 0.27 | 0.01 | 0.25 | 0.03 | 1 |
| Tobacco | 0.42 | 0.09 | 0.37 | 0.10 | 0.8 |
| Gas/Water | 0.22 | 0.02 | 0.16 | -0.04 | 0.8 |
| Beverages | 0.12 | -0.11 | 0.13 | -0.08 | 0.8 |
| Pharm & Bio | 0.13 | -0.09 | 0.14 | -0.08 | 0.7 |
| Oil & Gas Prod | 0.09 | -0.11 | 0.09 | -0.11 | 0.7 |
| Healthcare | 0.08 | -0.13 | 0.07 | -0.13 | 0.7 |
| Food retailers | 0.10 | -0.12 | 0.08 | -0.12 | 0.6 |
| Food producers | 0.13 | -0.11 | 0.06 | -0.14 | 0.6 |
| Mining | 0.09 | -0.12 | 0.06 | -0.13 | 0.6 |
| Banks | 0.06 | -0.15 | 0.01 | -0.18 | 0.6 |
| Personal Goods | 0.18 | -0.08 | 0.05 | -0.15 | 0.5 |
| Non-life Insurers | -0.02 | -0.20 | 0.00 | -0.19 | 0.5 |
| Chemicals | -0.04 | -0.22 | -0.03 | -0.21 | 0.5 |
| Software | 0.11 | -0.17 | -0.04 | -0.22 | 0.4 |
| Real Estate | 0.04 | -0.16 | 0.05 | -0.15 | 0.4 |
| Household goods | 0.11 | -0.13 | 0.03 | -0.16 | 0.4 |
| Industrial transport | 0.03 | -0.16 | -0.01 | -0.20 | 0.4 |
| Life Insurance | -0.07 | -0.22 | -0.01 | -0.20 | 0.4 |
| Support Services | -0.05 | -0.22 | -0.06 | -0.23 | 0.4 |
| Construction | -0.01 | -0.20 | -0.07 | -0.25 | 0.4 |
| General Industrials | -0.01 | -0.22 | -0.08 | -0.26 | 0.4 |
| Oil services | -0.15 | -0.30 | -0.12 | -0.28 | 0.4 |
| General retail | 0.04 | -0.17 | -0.06 | -0.24 | 0.3 |
| General financial | -0.07 | -0.23 | -0.09 | -0.26 | 0.3 |
| Aerospace | -0.07 | -0.24 | -0.10 | -0.26 | 0.3 |
| Electronics | -0.11 | -0.27 | -0.10 | -0.28 | 0.3 |
| Automotive | -0.11 | -0.27 | -0.12 | -0.28 | 0.3 |
| Travel & Leisure | -0.07 | -0.24 | -0.12 | -0.28 | 0.3 |
| Leisure Goods | -0.09 | -0.30 | -0.23 | -0.37 | 0.2 |
| Mobile telecoms | 0.00 | -0.05 | 0.12 | 0.03 | 0.2 |
| Tech hardware | -0.26 | -0.31 | 0.01 | -0.15 | 0.2 |
| Media | -0.14 | -0.29 | -0.10 | -0.27 | 0.2 |
| Engineering | -0.11 | -0.28 | -0.15 | -0.31 | 0.2 |
| Telecoms | -0.07 | -0.11 | 0.01 | -0.08 | 0.1 |
| Investment Trusts | -0.05 | -0.23 | -0.10 | -0.26 | 0 |
[This data was sourced from Thomson Datastream]
Over time, though, the real question is better put as "which sectors are likely to do least badly relative to the wider stock market during bear markets?" The two sectors that top the list are electricity & gas and water & multi-utilities. They have beaten the FTSE All-Share index in every bear market. Unfortunately, they've only actually been around in two of the nine periods we looked at, so this could be misleading.
There are good reasons why we might expect these two sectors to do well during bear markets. They both have low betas - ie, they rise and fall less than one-for-one with the wider market. Their businesses are stable and defensive. Electricity, gas and water are not discretionary items of expenditure, but key to our very existence. Encouragingly, both sectors have beaten the market during the sell-off that began last summer.
Of sectors with a longer track record, there are some quite interesting results.
Real estate, banks and software & computer services are not everyone's idea of defensive sectors that might be worth buying during times of stock market turbulence. That's probably a product of recent experience. Software was absolutely devastated during the 2000-03 bear market and is still a painful memory for many investors. Meanwhile, real estate and banks are suffering from the effects of the credit crunch.
Over time, however, these sectors have a decent record during bear markets. An obvious explanation once again lies in betas. Banks and real estate have proved relatively insensitive to moves in the wider market. In the current correction, both have failed miserably to keep up with the UK market as a whole. Their heavy falls have left them looking cheap on some fundamental measures, which could lead them to bounce strongly at some point. But there's no great urgency to rush out and buy into them just yet.
A low beta certainly can't explain the software sectors presence among bear market winners. High-tech sectors usually experience exaggerated moves compared with the wider stock market, so a falling market should produce underperformance rather than outperformance. One possible explanation here is that falling equity markets might be accompanied by lower interest rates, which would have an especially beneficial effect on the valuations of a growth industry such as software.
Among those other industries with a reputation for defensiveness, pharmaceuticals, food producers, tobacco and food & drug retailers have on average achieved positive relative returns over time. But their consistency is less impressive than that of the less likely suspects that we've just looked at. Still, their performances during the more recent episodes of market weakness have generally been impressive.
Looking at those sectors that tend to do badly during bear markets, we see fewer surprises. Cyclically-sensitive industries such as computer hardware, industrial engineering, media and household goods all figure prominently. True to form, they have pretty much all done badly in the present correction.
