Surprise sectors pack a punch

A TUMBLE of more than 15% in the benchmark FTSE 100 index and the All Share index meant that 2001 was a dreadful year for most stock market investors. But punters clever - or lucky - enough to pick relatively unglamorous, defensive sectors that had bombed in recent years would have made a decent profit.

The sector winners were packaging, household goods and textiles, general retail, tobacco, mining, construction and building materials, health and leisure. Full marks to investors who picked any of these, especially packaging, up nearly 50%. And a pat on the back for those who picked any of another dozen sectors that convincingly beat the market.

Once again, there is a strong defensive theme, relative lack of glamour and a sense of the pendulum swinging back from the pattern of recent years.

The year's five worst-performing sectors offer a sharp contrast in type. For the second year running, they are the hi-tech glamour sectors of yesteryear without any conspicuous defensive characteristics - infotech hardware, software and computer services, electronics, telecoms and media and photography. These led the market to dizzy heights two years ago but plunged by between 30% and 80% in 2001.

Sectors that have seen losers of up to 31% this year are insurance, transport, life assurance, support services, finance, and distributors. Some of these were also high-stepping a year or two back.

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.

The law says that when it comes to stock market sectors every dog has its day and some have more than one. Never write off a losing sector or back a winning one on the expectation it will go on rising for ever. You are more likely to win in a new year by backing failure rather than success.

What has been different this time is that the hi-tech boom and bust has been far more spectacular than previous sector ups and downs and its phases have lasted longer. This is well illustrated by the telecoms sector, a spectacular winner three years running up to 1999 and an equally spectacular loser since.Other tech sectors have shared its fate over the past three years, with even more dramatic reversals.

In 1999, IT, software and computer services and telecoms posted gains of 510%, 160% and 73% respectively. Now the big question is whether they will prove to be a once-in-a-lifetime phenomenon or follow the law of reversing fortunes and show a respectable performance in 2002.

Sector ratings play a part in sector-performance and I said a year ago it would be surprising if tech sectors recovered smartly in 2001, while the ratings of packaging, tobacco, water, banks and building were all low enough to justify promotion to the top of the table.

It worked out that way. The telecoms, computer software, IT and media sectors are still on mega ratings, with average price-earnings ratios of 50 to 80, but electronics has come down closer to earth with an average of 24.

It could be time to chance a small sum on selective investments in tech sectors, bearing those ratings in mind. But you would almost certainly be safer betting on lowly-rated sectors such as building, mining, engineering, cars and car parts, household goods and tobacco, all rated on PE ratios of 10 or less.