Spotting stars among Cinderellas

THE headlines may have shrieked stock market doom over the past month, but it is not as bad as you think. There is plenty to cheer about in sector performance. While the Footsie 100 index has plunged a nasty 11% in the first half of this year, and is nearly 20% below its level of a year ago, half the sectors on the stock market have risen and two-thirds, 23 out of 34, have soundly beaten the market.

Investors picking the right sectors bucked the downward trend and made decent profits in the half-year to the end of June. In the best traditions of sector performance, the winners in 2002 are 12 sectors that are relatively unglamorous, old-fashioned and defensive, which bombed for much of the 1990s - what some call the 'Cinderella' sectors. They are tobacco, food, drink, personal care, metals, defence, paper, car components, building, property, textiles and transport. They have all been to the ball this year with gains ranging from 6% to nearly 30%.

Tobacco seems an unlikely winner, with cigarette consumption falling in this country and multi-billion dollar lawsuits in America, but it has been a star three years running as investors have been attracted by rising income from the Big Three, British American Tobacco, Imperial and Gallaher. The same can be said of personal care and metals, which have been boosted by solid recovery scenarios at companies such as Reckitt Benckiser and Corus.

Others that have risen include steady old-fashioned sectors such as engineering, water, electricity, chemicals and oil. Yet another six sectors convincingly beat the market on its downward path by falling less than average. They are mining, gas, leisure, supermarkets, banks and stores. All have fallen less than 11%.

Once again, there is a strong defensive theme, relative lack of glamour and a sense of the pendulum swinging back from the pattern of the late 1990s. The most important thing to do this year has been to avoid the 11 worst-performing sectors which, though few in number, drove the market sharply lower.

For the third year running they are the hi-tech glamour sectors of yesteryear without any conspicuous defensive characteristics - information technology, computer services, electronics, telecoms, media, support services, health and drugs, which led the market in a dizzy upwards spiral two or three years ago, plus life insurance, general insurance and financials, whose huge share portfolios have lost out badly in the market fall. They have highlighted their lack of defensive merits by plunging heavily, between 12% and 60%, convincingly outpacing the market in its fall.

It has not quite been a classic year for sector performance and the law of reversing fortunes, which says last year's winners are usually this year's losers and vice versa. But it does show the case for backing the losers of yesteryear and taking profits on past winners.

What has been different in the past three years is that the hi-tech boom and bust has been far more spectacular than previous sector ups and downs and it has taken longer to run its course.

It could be time to chance a small sum on careful, selective investments in hi-tech sectors. But lowly-rated 'Cinderella' sectors are almost certainly a safer bet. Sector ratings play a part in sector performance and hi-tech sectors such as telecoms, computer services and media continue to be highly rated, despite three years of falling prices. So do the insurance and financial sectors. Tobacco, paper, water, building, mining, engineering and cars remain lowly rated.