Sector Analysis

What Is Sector Analysis?

Sector analysis is an assessment of the economic and financial condition and prospects of a given sector of the economy. Sector analysis effectively gives an investor a judgment about how well companies in the sector are expected to perform. Sector analysis is commonly employed by investors who work in a particular sector, or who utilize a top-down or sector rotation approach to investing.

In the top-down approach, the most encouraging sectors are distinguished first, and afterward the investor audits stocks inside that sector to figure out which ones will at last be purchased. A sector rotation strategy might be employed by investing in particular stocks or by utilizing sector-based exchange-traded funds (ETFs).

How Sector Analysis Works

Sector analysis depends on the reason that certain sectors perform better during various stages of the business cycle. The business cycle alludes to the all over changes in economic activity that happen in an economy over the long run. The business cycle comprises of expansions, which are periods of economic growth, and compressions, which are periods of economic decline.

Right off the bat in the business cycle during the expansion phase, for instance, interest rates are low and growth is beginning to get. During this stage, investors or analysts who do a sector analysis would zero in their research on companies that benefit from low interest rates and increased borrowing. These companies frequently perform well during periods of economic growth. These remember companies for the financial and consumer discretionary sectors.

Late in an economic cycle, the economy contracts and growth slows. Investors and analysts will direct their concentration toward researching [defensive sectors](/defensivestock, for example, utilities and telecom services. These sectors frequently outperform during economic downturns.

Types of Sector Analysis

Two common approaches to sector analysis are the top-down and sector rotation approaches.

Top-Down Approach

Investors who utilize a top-down approach to sector analysis center first around macroeconomic conditions as they continued looking for companies that can possibly outperform. They start by taking a gander at those macroeconomic factors that biggestly affect the biggest part of the population and the economy, for example, unemployment rates, economic results, and inflation.

They then drill down to find those sectors that perform best during the predominant economic conditions. Finally, they examine the fundamentals of companies inside those sectors to recognize stocks that offer the best potential for future profits.

Sector Rotation Approach

Investors and portfolio managers utilize a sector rotation approach to pivot their investments all through different sectors of the economy. They buy and sell contingent upon market cycles and trends that influence the profitability of certain sectors over others.

These market cycles may be [seasonal](/seasonal-industry, for example, investing in the retail sector before the year's end holiday race to exploit stocks that benefit from increased consumer sales. The investor could turn all through cyclical stocks and defensive stocks relying upon where in the business cycle the economy is going.

Sector Taxonomy

In sector rotation strategies, investors might characterize sectors in different ways. Be that as it may, a commonly utilized scientific categorization is the Global Industry Classification Standard (GICS) developed by Morgan Stanley Capital International (MSCI) and Standard and Poor's.

GICS comprises of 11 sectors, which are broken down into 24 industry gatherings, 68 industries, and 157 sub-industries. The consumer staples sector, for instance, comprises of three industry gatherings: 1) food and staples retailing, 2) food, refreshment, and tobacco, and 3) household and personal products.

These industry bunches are broken down further into industries. Food, drink, and tobacco, for instance, comprises of those three, which are then broken into sub-industries. The refreshment industry, for instance, is comprised of three sub-industries: brewers, distillers and vintners, and soft beverages. Sector rotators don't be guaranteed to limit themselves to sectors. They might decide to underscore industry gatherings, industries, or sub-industries.

Features

• Investors use sector analysis to survey the economic and financial possibilities of a sector of the economy.
• The top-down approach is a type of sector analysis that initially centers around macroeconomic factors that influence an economy, like unemployment and inflation.
• Investors who use sector analysis accept that certain sectors of the economy perform better at various stages of the business cycle and that recognizing these sectors can assist them with tracking down productive investments.
• Investors who utilize the sector rotation approach actively shift their investments starting with one sector then onto the next, contingent on market cycles and trends that impact the possible profitability of different sectors.