The Worst Hit Equity Sectors in 2020

As global stock markets plummet, we look at how the performance of each of the equity sectors compares to their long-term returns 

Annalisa Esposito 16 March, 2020 | 11:34AM
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As stock markets have plunged into bear market territory, there have been few places for investors to hide. The FTSE has endured its biggest one-day falls on record, while some companies have seen their share prices fall by as much as 80% in a matter of days. 

Investors are often advised at times of volatility to keep calm and keep their money in the market, but that can be easier said than done when share prices appear to be in freefall. In such instances, it pays to focus on the long-term. 

Morningstar analysis shows why taking a long-term view can reap rewards. We have looked at the average quarterly return of 16 equity sectors over a 10 year period and have compared that with the performance of each sector year to date.

While the current figures don't make for easy reading, the long-term numbers are more heartening. And while every sector is in negative territory so far in 2020, the difference in return between the best and worst performing sectors is stark. While Healthcare is down 9.8% year to date, for example, the Financial Services sector has fallen 25.1% - it highlights the importance of a well diversified portfolio. 

Cyclical Stocks

Cyclical stocks are known for following the cycles of an economy; investors tend to buy more of those during boom years and less during a recession. Cyclical companies are those which can fall in and out of favour and which are more sensitive to a recession. They include areas such as airlines, hotels, financial services and natural resources. 

These are all industries which have been hit hard since the outbreak of the coronavirus. Equities in the Natural Resources sector have fallen 30.1% so far this year, driven largely by a plunge in the oil price. Precious metals, meanwhile, are down 17.9% and Agriculture 21.3%.

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But it is important for investors to keep an eye on returns over a longer period than just the most recent quarter. For the purposes of comparison, we have analysed the average quarterly return these sectors have delivered over the past decade. Over 10 years, Natural Resources equities have typically delivered growth of 6.7% per quarter, Precious Metals a hefty 18.2% and Energy 6.9%. 

Defensive stocks

Because they provide goods and services that are in constant demand, defensive stocks can often provide stable earnings regardless of the state of the economy. These are areas such as groceries, utilities and healthcare, which individuals require regardless. Such sectors are often called bond proxies, because their reliable earnings stream tends to enable them to pay sustainable dividends

defensive

It is unsurprising, then, that Defensives contains the two sectors which have been least hit in the recent stock market tumult. The Healthcare and Utilities sectors are down 9.8% and 9.9% respectively year to date. 

Over 10 years, the pair have been strong performers too, delivering average quarterly returns over 16% and 8.6% respectively. Consumer Goods and Services includes areas which are seen as staples as well as more discretionary items, represented by stocks such as Nike and Starbucks. As a result, the sector has also suffered in recent weeks, down 17.3% since the start of the year, compared with a typical quarterly return of 13.6%. 

Sensitive stocks

Sensitive sectors fall between defensive and cyclical stocks. These stocks are sensitive to political events, which historically have led to volatility, thus they ebb and flow with the overall economy, but not as much as cyclical sectors. These include industries including Infastructure, Communications and Technology. 

sensitive stocks

Energy has been the hardest hit of these sectors over the past quarter, largely led by a sudden plunge in the oil price. The sector is down an eye-watering 40.3% year to date, the worst perfomer of all the sectors. Interestingly, while its long term returns are in positive territory, its average quarterly return over the past 10 years has been the weakest of all the sectors at 6.9%. 

Technology stocks, which have delivered an impressive average quarterly return of 17.8% over the past decade, are down 12.2% since the start of the year. However, it's worth noting that many investors remain positive on technology stocks as they believe these companies could be well-placed to benefit from the pandemonium caused by coronavirus. In particular, a boom in home-working could support software businesses, while online retailers may benefit if people are confined to their homes. 

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk