Analysis of this year in the stock market is really all about labels. An association with the Internet, a telephone or in fact anything vaguely technological was enough to propel almost any share into the stratosphere. Conversely, stocks with even a hint of the appellation "value" about them were condemned to languish at the bottom of the performance table.
So it was with sectors. The analysis is made a little more complex because of changes introduced in April, when many of the constituents of the Electric and Electrical Equipment sector were extracted to form the Information Technology Hardware Sector. Since that sector sprang to life it has outpaced everything in sight. But for most of the year it only contained four, relatively small and illiquid, stocks. It was not until the newly created Marconi (LSE: MNI) was admitted to the group at the end of November that it contained a company of significant size and profitability.
Without doubt the key to the performance of this sector was the very limited liquidity in companies like ARM Holdings(LSE: ARM). As institutional money started to come in to a sector that initially was only capitalised at £4 or £5b it rapidly pushed the prices up to seemingly outrageous levels. But as the year progressed, and there was only a minor consolidation in October, fresh index tracking money was drawn to the sector because its size approached the threshold of the All Share trackers.
When we started our Sector Dissector articles in stock ideas back at the end of October, the Information Technology Hardware sector lay 34th in the ranking of FT sectors. As I write this in the second week of December that sector now occupies the number 10 slot. That is pretty good going, by any standards.
After this demonstration of the power of returns from the hi-tech sector it is rather surprising to find that the sector with next best performance record was boring old mining. The principal reason for this is what economists grandly call "positive base effects". I love that phrase. All it means is that if something is hugely depressed when you start the analysis it doesn't have to do much to look halfway decent. And that certainly applied to the mining industry at the start of the year. If you cast your minds back to the dim and distant past of 12 months ago, the world was still recovering from the shock of the Russian debt default and devaluation as well as the collapse of the hubristically named Long Term Capital Management. Commodity prices were depressed by massive exports from Russia and demand was constrained by Japan still denying it had a problem and a Europe that seemed to be stagnating. Could things be any worse?
Well, no they couldn't really. And that was why mining shares were so cheap and such a stunning investment. The two major companies at that time, Rio Tinto(LSE: RIO) and Billiton(LSE: BLT), were offering yields twice that of the market and price to earnings (P/E) ratios half that of the market. That in itself was not enough to make them go up. However, by the second quarter it was apparent that the US was still on a charge, and Japan was having a little growth spurt, so investors cottoned on that the downside had all gone and there was only upside left. So they bought the shares.
Given the excitement in the telecommunications sector this year, in both fixed and mobile, it surprising that the Telecommunications Services sector only achieved third place in the performance tables. To some extent its position as the largest sector worked against it. If everybody already owns it there can only be a small pool of potential investors that might be buyers. Nevertheless, even if in relative terms it was an also-ran, most people would be more than happy with a gain of 64% over the year.
Close behind telecoms came Media and Photography, though I have yet to discover which is the photographic share in the index. Mostly it is TV and newspaper companies and totally dominated by BSkyB (LSE: BSY). However, if there is one sector that is going benefit directly from the Internet it must be this one. The ability to deliver content, be it news, share prices, restaurant phone numbers, TV programmes or advertising, over the Internet will change this group of companies perhaps more than any other. With 43 members this sector is one of the largest in the All Share by number of companies, although the average size is not large. However, given the talks under way between Carlton (LSE: CCM) and United News & Media(LSE: UNWS) and the proposed merger of Flextech (LSE: FLXT) with Telewest(LSE: TWT) it is likely that there will be far fewer members next year.
To compete with the global media giants like Time Warner, Disney and so on the sector must consolidate. But that process is hampered by the complex rules governing media ownership in the UK. BSkyB ran foul of this problem when it tried to buy Manchester United(LSE: MNU) last year. Quite how the government and industry will reconcile the conflicting problems of global strength and domestic competition should keep the DTI busy for a while. For investors the question is how much value would be added by consolidation.
Of course for every sector that goes up there must be one that goes down. But because the whole market has gone up, the falls are not as dramatic as the rises.
The wooden spoon goes to the water sector with a plunge of 37%. In some ways this was a fall waiting to happen ever since the change of government two and a half years ago. The sector survived the windfall tax imposition and an increasingly tight regulatory regime but it had clearly lost momentum. The most recent pronouncement from Ofwat demanding price cuts was the excuse the companies needed to cut more jobs and slash dividends. That shouldn't have surprised the market, but it did and the sector fell almost 10% the following day, although it has bounced a little since. Historic price to earnings ratios of 6.3 and dividend yields of 7.9% are obviously enough to encourage some investors into the sector despite the lack of growth. In a bear market this would definitely be one of the sectors to be in, but who knows when that will happen?
Water has performed significantly worse than most sectors. Food Producers and Processors, the second worst performer this year fell 28%. That is not good, but it is 10 percentage points better than the water companies. Despite having 23 constituents the fortunes of the sector depend heavily on one company. Unilever(LSE: ULVR) accounts for 41% of the sector and it hasn't had a good year, even though it gave shareholders a large special dividend of 66.13p per share in May. Many saw that as an admission that it could not put its cash pile to good use, probably rightly so. Since then it has decided to trim its product range and focus on fewer, higher margin, brands.
Food producers, making essentially commodity products, are also exposed to the ferocious competition in the food retailing sector and undoubtedly would have been expected to take some of the pain through their margins as well. Northern Foods(LSE: NFDS), a major supplier to Marks & Spencer (LSE: MKS), was one that suffered in this way. But at least one company will be taken out of its misery. At long last someone is going to take over United Biscuits (LSE: UBIS).
Altogether 12 sectors have given negative returns this year. In addition to the ones we have listed above, they are:
Tobacco, down 29.5%
Electricity, down 25%
Personal Care and Household products, down 16%
Transport, 15%
General Retailers, down 14%
Beverages down, 14%
Food and Drug Retailers, down 13%
Insurance, down 11%
Restaurants, Pubs and Breweries, down 9%
Pharmaceuticals, down 8%
While some members of this group are not a surprise, such as Tobacco, Electricity and General Retailers, it is a shock to see Pharmaceuticals, the fourth biggest sector in the market amongst the losers. Their optimistic valuations do not seem to be justified by their pedestrian revenue growth and dearth of new products. Will reality catch up with them next year? It just might.
The inclusion of Insurance companies in this group of losers is a little unfair because it mainly reflects the weak performance of the bond markets where most of their assets lie. Another surprise is the poor performance of Restaurants, Pubs and Breweries. Half a dozen breweries and pub chains have changed hands this year, but other publicans seem to have been the only buyers, the investing public didn't want to know.
Because the top performing sectors have been so good this year it is easy to overlook some sectors that were not in the top handful but have nevertheless put in stunning performances. Distributors, a mixed sector that includes car retailers such as Reg Vardy(LSE: VDY) and star performer Electrocomponents(LSE: ECM), rose 52% this year. Given the weakness in used car prices it will do well do match that next year.
Packaging moved up 37% in 1999. That is a good move in anyone's books and is a function of a cyclical recovery and depressed valuations at the start of the year. Perhaps less surprising is the 33% gain in the Oil & Gas sector -- after all, oil prices have risen by 250% in the year.
The list of sectors that have delivered double digit percentage rises in 1999 and that we have not mentioned yet is still quite handsome. Look:
Investment Companies, up 37%
Specialised and other Finance, up 29%
Automobiles, up 29%
Chemicals, up 26%
Diverse Industrials, up 22%
Construction and Building Materials, up 16%
Banks, up 13%
Real Estate, up 12%
Engineering and Machinery, up 12%
Quite a long list and containing some rather unprepossessing constituents. One cannot help but wonder why some of them have done so well.
That brings us to the end of our look at in 1999 by sector. It is tempting, but dangerous, to try and capture a whole year in a stock market in a few words. But it is hard to resist the observation that while value investors were on a hiding to nothing in 1999, those in pursuit of growth could do no wrong.
