The Colombo Stock Exchange (CSE) computes 20 sector indices on an ongoing basis and the closing values are published at the end of every trading day. They 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 part- nership 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, 15 major economic sectors are considered to cover the length and breadth of quoted companies in Sri Lanka – viz. banks; capital goods; con- sumer durables and apparel; consumer services; diversified financials; energy; food and staples retailing; food, bever- age and tobacco; healthcare equipment and services; insurance; materials; real estate; retailing; telecommunication ser- vices and transportation.
Capital goods lead the way amongst the leading listed companies in Sri Lanka in 2019/20 with their cumulative income representing 23 percent of the LMD 100’s combined revenue and 24 percent of shareholders’ funds.
The banks follow as the second largest player in the LMD 100 with an aggre- gate income in excess of Rs. 700 billion and a share of 19 percent of cumulative revenue in the review period.
What’s more, the sector accounted for 28 percent of LMD 100 profits and 26 percent of shareholders’ funds in 2019/20. The banks also represent near- ly half of the LMD 100’s total assets.
Food, beverage and tobacco are third in line with their cumulative top line of 655 billion rupees accounting for 17 per- cent of the LMD 100’s aggregate income. The sector also reigns supreme in terms of its share of the LMD 100’s market capitalisation.
Diversified financials – which is the runner-up in the asset stakes – along with food and staples retailing, telecom- munication services, materials, retailing, insurance and energy 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 pro- vides investors with information with which to make educat- ed judgements with respect to how companies in a given sector are likely to perform.
Investopedia also explains that “sector analysis is typical- ly employed by investors who specialise in a particular sec- tor or use a top-down or sector rotation approach to invest- ing.”
It continues: “In the top-down approach, the most promis- ing sectors are identified first and then the investor reviews stocks within that sector to determine which ones will ulti- mately be purchased. A sector rotation strategy may be employed by investing in particular stocks or by employing sector-based exchange traded funds.”
“Early in the business cycle, during the expansion phase for example, interest rates are low and growth is beginning to pick up. During this stage, investors or analysts who do a sector analysis would focus their research on companies that benefit from low interest rates and increased borrow- ing. These companies often perform well during periods of economic growth. These include companies in the financial and consumer discretionary sectors,” it adds.
Meanwhile, “late in an economic cycle, the economy con- tracts and growth slows. Investors and analysts will turn their attention to researching defensive sectors, such as utilities and telecommunication services. These sectors often outperform during economic downturns.”