We also look at the industries which have been most out of favour in the first quarter
Thursday 04 Apr 2019 Author: Tom Sieber

While the performance of the FTSE 100, FTSE 250 and FTSE All-Share tends to dominate the headlines, it can be useful to take a more nuanced approach and focus on the performance of individual sectors within these headline indices.

The tables show the five best and five worst performing sectors in the FTSE 350 index (a composite of the large cap FTSE 100 and mid cap FTSE 250) so far this year. We look at what is behind this performance and some of the stocks which have driven the gains (and losses).

WHICH SECTOR CAME OUT ON TOP?

The top performer is the FTSE 350 Industrial Metals sector which consists of two firms: Evraz (EVR) and Ferrexpo (FXPO). The former recently reported very strong full year results with a surge in free cash flow and profit, while net debt fell. The company generated $3.78bn earnings before interest, tax, depreciation and amortisation (EBITDA), its highest level since 2008.

Ferrexpo’s share price has been driven by a rising iron ore price caused by Vale’s production cutbacks hurting global supplies. Investors have taken the view that the iron ore producer’s 2019 earnings will get a handsome boost.

However, it is still waiting to publish last year’s earnings after an audit of charitable donations identified a number of ‘discrepancies’.

TECH STOCKS

You might think fast-growing, highly-rated stocks were behind the FTSE 350 Software & Computer Services sector’s popularity in 2019 but that isn’t the case.

Long-established suppliers like accounting specialist Sage (SGE) and infrastructure IT group Micro Focus (MCRO) provided much of the share price fuel for the sector as they are both worth approximately £8bn, with near-£5bn engineering design firm AVEVA (AVV) also a significant influence on the sector performance.

Firing investor optimism in 2019 is progress with the integration of large and complex acquisitions (Micro Focus/AVEVA) while there is renewed hope that Sage’s new management team can get a better grip on cloud delivery.

DEFYING THE DOOM-MONGERS

Given all the doom and gloom about the retail industry, it may come as a surprise to see the FTSE 350 General Retailers sector as one of the star performers  this year.

Of the 15 constituents, nine have delivered more than 20% share price gains year-to-date and only one – Vivo Energy (VVO) – has seen its share price fall.

Dunelm (DNLM) has been the star performer with strong earnings momentum. Like-for-like sales grew by 6.9% to £506.7m in the second half of 2018. It was a similar story with JD Sport Fashion (JD.) which emerged as a winner over the Christmas period.

Pets at Home (PETS) has bounced back after an awful few years on the stock market as it addressed issues around pricing, sorted out its vets business and enjoyed earnings upgrades from the analyst community.

In fourth place is the FTSE 350 Technology Hardware & Equipment sector which has been left threadbare after multiple company departures in recent years, such as the £24.3bn takeover of microchip designer ARM.

Waving the defiant flag for UK hardware manufacturers now largely falls to £880m communication networks testing equipment designer Spirent Communications (SPT), which is finally promising an end to a multi-year lull as next generation 5G mobile and ethernet networks start international roll-outs.

Demand during these technology cycles is often underestimated by investors. 5G, which promises faster, fatter virtual pipes to sate the world’s expanding data appetite, should be a long-run revenue and profit driver for Spirent.

A 22% rally in the share price in 2019 so far suggests investors are starting to pay attention and that the momentum could continue.

TOBACCO COMEBACK

The FTSE 350 Tobacco sector is made up of two stocks: Imperial Brands (IMB) and British American Tobacco (BATS). Their share price recovery this year follows an extremely difficult 2018 when a combination of tighter regulation and competitive pressures saw Imperial and British American fall 25% and 50% respectively.

Having been out of the tobacco space for some time, the manager of Merchants (MRCH) investment trust Simon Gergel took advantage of sector weakness. He added Imperial to the portfolio in September 2018 and British American Tobacco at the start of 2019.

‘A year ago, there were no tobacco shares in the Merchants portfolio. Now this sector makes up over 6.5% of the total, due to the compelling value we see,’ he explains.

THE WORST PERFORMERS

Looking at the culprits behind the lukewarm performance of the FTSE 350 Health Care Equipment & Services sector, organic growth concerns in the United Arab Emirates have weighed on NMC Health (NMC) and rival Mediclinic (MDC), making them the weakest performers in the space year-to-date.

NMC recently missed annual earnings per share forecasts, while Mediclinic is struggling with a weaker performance in its Swiss subsidiary.

Four of the worst performing sectors are highly concentrated which may or may not be a coincidence but does at least hint at the benefits of a diversified approach to investing.

The lacklustre showing of the FTSE 350 Leisure sector is easy to understand as Games Workshop (GAW) is the only constituent of this sector.

The fantasy miniatures group has lagged the broader market rally this year with its shares stuck in a narrow trading range.

Half-year results published in January were slightly disappointing as growth slowed and online sales remained relatively weak. It also said gross margins and stock levels weren’t at desirable levels.

Fixed Line Telecommunications and Mobile Telecommunications are dominated by BT (BT.A) and Vodafone (VOD) respectively. Both companies have been hit by market concerns over their borrowings and capacity to maintain generous dividends.

On 31 January BT reported that revenue for the nine months to 31 December 2018 fell 1% to £17.5bn while normalised free cash flow declined by £210m to £1.74bn. Net debt also soared, increasing by nearly £2.2bn to £11.1bn.

Questions over Vodafone’s dividend have been linked to high levels of debt with net borrowings of €32bn as well as heightened competitive threats, and the substantial spending needed to deliver faster fifth generation mobile networks.

ASTON MARTIN DISAPPOINTMENT

The Automobiles & Parts sector is the worst performing category of stocks in the first quarter of 2018, down 7.4%. It includes luxury car maker Aston Martin Lagonda (AML) and automotive fluid systems engineer TI Fluid Systems (TIFS).

Aston Martin has been a big disappointment since its 2018 stock market debut with Brexit-inspired supply chain issues adding to concern about the investment required to deliver on its growth strategy.

The question for the market is whether these issues are now adequately priced in with the shares trading nearly 46% below their £19 listing price at £10.27.

TI Fluid, which is also trading substantially below the 255p price from its own flotation in October 2017 at 181p, looks a more interesting story with the company demonstrating its ability to eke out growth in a difficult automotive market and successfully making the transition to electric vehicles.

A 2019 price-to-earnings ratio of 7.1-times and a dividend yield of 4.2% look attractive against this backdrop.


PLAYING SECTORS WITH ETFS

Exchange-traded funds (ETFs) are often labelled as index-tracking products but while this is an accurate description they do not simply track indices like the FTSE 100. You can also use them to
gain exposure to individual industry sectors.

If you think the dynamics behind a particular part of the stock market look attractive or you want to play momentum in a particular sector – and it is relatively easy to get performance data on individual sectors – then through an ETF you can express that view in a rapid and cost-effective manner.

This could be seen as a good halfway house between buying exposure to the wider market through a FTSE 100 ETF and stock picking. You may not have the time or the inclination to buy individual stocks but instead you may like the idea of gaining diversified exposure to an industry which you think looks well placed in the long-term.

However, most sector-based ETFs are either global or Europe-wide rather than being specific to the UK. The table shows a list of the best performing sector-based ETFs over the past 12 months.

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