In an interesting development, Britain’s financial sector no longer represents the largest component of the UK FTSE 100 index, which comprises the 100 largest companies listed on the London Stock Exchange. For the first time in a decade the index is dominated by the consumer goods sector, which made up nearly 21% of its weightings as at the end of February; marginally more than the banks, insurers and asset managers that make up the financial sector.
So what has driven this turnaround? First, consumer goods companies have by and large prospered in what has been a difficult market environment. Worried by economic uncertainty, investors have been drawn to stable companies with strong balance sheets that can ride out downturns robustly. Companies such as Unilever, Reckitt Benckiser and Diageo, which provide goods that are purchased every day regardless of the economic weather, have therefore become extremely popular.
In contrast, the banks, which account for a large part of the financial sector, have been struggling. The financial crisis and the likes of PPI claims have all taken their toll and investors are worried that the traditional banking business model is vulnerable in an environment of economic stagnation and “lower for longer” interest rates.
Although it seems natural to look at sectors that are doing well as a ‘good investment’, investors must remember that popular sectors have a tendency to become overvalued and therefore exposed to valuation risk. In recent history one only needs to think of the technology and commodity sectors as examples of parts of the market that have become extremely popular only to collapse. The challenge for investors is to balance the merits of quality and value within a diversified portfolio.