This section is based on research done by Dirk Hofschire of Fidelity Investments.
The market cycles through four main phases:
1. Early Phase: Begins before the end of a Recession as investors anticipate an improvement in the market.
2, Mid Phase: The recovery broadens into expansion and the market generally does well.
3. Late Phase: Begins prior to beginning of recession as the market anticipates a slow down in economic activity. Market tends to be flat.
4. Recession. Economic activity decreases and market returns are negative.
Different Sectors perform better depending on the Phase:
1. Early Phase: Consumer Discretionary, Financials, Information Technology, Industrials
2. Mid Phase: Industrials, Energy, Materials, Information Technology
3. Late Phase: Energy, Materials, Consumer Staples, Health Care
4. Recession: Consumer Staples, Health Care, Telecommunications, Utilities.
(Note the overlap between phases.)
The following ratio charts are for the S&P Sectors compared to the overall general market (XAO) since the beginning of 2009.
Finally, some conclusion is then made about the current stage of the Australian market.
(The above research by Hofschire is on the American market, but given that the two countries have similarly developed economies, standards of living and correlated markets, the research should be valuable for the Australian context.)
TELECOMMUNICATIONS
Expected Best Phase: Recession Trended down since beginning of 2009. May be bottoming out. Indicative of Late Phase
MATERIALS
Expected Best Phases: Mid/Late Has trended strongly upwards since May 2010. Might have peaked. Indicates the market may be entering the Late Phase
INDUSTRIALS
Expected Best Phases: Early/Mid Appears to have peaked in early 2010. Consistent with outperformance in Early/Mid Phase.
HEALTH
Best Stages: Late/Recession Might have bottomed in late 2010. Consistent with outperformance in Late/Recession Phases.
FINANCIALS
Expected Best Stage: Early Peaked in late 2009. Consistent with outperformance in the Early Stage of the Cycle.
INFORMATION TECHNOLOGY
Expected Best Phases: Early/Mid Appears to have peaked in 2nd QTR 2010. Consistent with outperformance in Early/Mid Phases
ENERGY
Expected Best Phases: Mid-Late Gentle up-trend since early 2010. Best period for performance may still be ahead.
CONSUMER STAPLES
Expected Best Phases: Late, Recession Best performance may still be ahead in ?recession? phase.
CONSUMER DISCRETIONARY
Expected Best Phase: Early Outperformed early in the cycle, as expected.
UTILITIES
Expected Best Phase: Recession.
CONCLUSION
Sectors of the Australian market since the beginning of 2009 have closely followed the road map set out by Hofschire.
The market now appears to be in the mid-late phase.
Best performing sectors should be: Energy, Materials, Consumer Staples, Health
Looking at the Ratio Chart of Materials - it may have peaked already - so we can expect a flat performance before a drop-off.
If the market is now entering the ?Late Phase? we can expect an overall flat performance for some months.
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