The Colombo Stock Exchange (CSE) computes as many as 20 sector indices on an ongoing basis and the closing values are published at the end of trading every day. These reflect the price movements of companies in the 20 service sectors. The sector price indices therefore, are deemed to be an indication of market trends.
Moreover, the S&P/CSE Industry Group Indices are the result of a partnership between S&P Dow Jones Indices and the CSE. They’re designed to measure the performance of various industry groups in the equities market in Sri Lanka as defined by the Global Industry Classification Standard.
For the purpose of analysing the LMD 100 results too, 20 major economic sectors are considered to cover the length and breadth of quoted companies in Sri Lanka – they are diversified holdings; banks; finance; beverage, food and tobacco; manufacturing; telecommunications; power and energy; insurance; oil palms; trading; motor; chemicals and pharmaceuticals; construction and engineering; hotels and travel; investment trusts; healthcare; land and property; footwear and textiles; stores and supplies; and plantations.
Diversified holdings lead the way amongst the leading listed companies in Sri Lanka in 2018/19 with their cumulative income representing 30 percent of the LMD 100’s combined revenue and 27 percent of shareholders’ funds.
The banks follow as the second largest player in the LMD 100 with an aggregate income in excess of Rs. 660 billion and a share of 18 percent of cumulative revenue in the review period. What’s more, the sector accounted for 25 percent of LMD 100 profits and shareholders’ funds respectively in 2018/19.
Finance companies are third in line with their cumulative top line of 419 billion rupees accounting for 11 percent of the LMD 100’s aggregate income. The sector is also the runner-up in the asset stakes – behind the banks, which represent nearly half of the LMD 100’s total assets.
Beverages, food and tobacco – which reigns supreme in terms of its share of the LMD 100’s market capitalisation – along with manufacturing, telecommunications, power and energy, insurance, oil palms and trading round off the top 10 sectors in the LMD 100.
SECTOR ANALYSIS This usually involves an evaluation of the condition and potential of sectors in an economy, and provides investors with information with which to make educated judgements with respect to how companies in a given sector are likely to perform.
Investopedia also explains that “sector analysis is typically employed by investors who specialise in a particular sector, or who use a top-down or sector rotation approach to investing.”
It continues: “In the top-down approach, the most promising sectors are identified first and then the investor reviews stocks within that sector to determine which ones will ultimately be purchased. A sector rotation strategy may be employed by investing in particular stocks or by employing sector based exchange traded funds.”
“Sector analysis is based on the premise that certain sectors perform better during different stages of the business cycle. Early in the business cycle for example, interest rates are low and growth is beginning to pick up. During this stage, companies that benefit from low interest rates and increased borrowing often do well… Late in an economic cycle, when growth is slowing, defensive sectors… often outperform,” it adds.
‘Sectors’ are typically considered to be a broad classification. Within each sector, numerous sub-sectors and industries can be further delineated. When it comes to sector rotation strategies, investors may refer to sectors in a number of ways.
The Global Industry Classification Standard (GICS), which has been developed by MSCI and Standard & Poor’s (S&P), is a commonly used taxonomy.
Its hierarchy begins with 11 sectors (energy, materials, industrials, consumer discretionary, consumer staples, healthcare, financials, IT, telecommunication services, utilities and real estate) that can be further delineated by 24 industry groups, 68 industries and 157 sub-industries.
And GICS follows a system that assigns a code from each grouping to every company traded in the stock market. The coding system is integrated throughout an industry, enabling detailed reporting and stock screening by way of financial technology.
A diversified stock portfolio will typically include shares across a majority of the GICS sectors. Diversification across stock sectors is thought to help moderate risks that result from factors impacting specific industries or companies within them.
In addition, sector indices can be used by investors looking to invest in growth opportunities of a particular sector. Global investment companies provide passive index funds (e.g. the Vanguard Information Technology Index Fund) that seek to replicate the 11 GICS sectors.