In this episode of “Investment Management Foundations,” Wealth Enhancement Senior Portfolio Manager Ayako Yoshioka discusses the Global Industry Classification Standard (GICS) sectors and explains how different sectors are impacted by the business cycle and how sensitive each sector is to interest rates.
VIDEO TRANSCRIPT BELOW
Hello, and welcome to another segment of “Investment Management Foundations.” My name is Aya Yoshioka, and I am a Senior Portfolio Manager here at Wealth Enhancement Group. I'm here today to talk about sectors. MSCI and S&P Dow Jones, which are companies known for their benchmark indices, developed a classification standard to provide investors with a classification system for companies. This is known as the global industry classification standard, or GICS for short.
There are 11 sectors. The sectors are consumer discretionary, consumer staples, communication services, energy, financials, health care, industrials, information technology, materials, real estate, and utilities. One of the ways we think about sectors is how companies and stocks are impacted by the business cycle, which is really the boom/bust cycle of the overall economy. After each recession, there is a recovery phase, followed by a mid-cycle phase of moderate growth, a late cycle phase that has highlighted sort of overheated areas of the economy, and lastly, a recession phase, where the economy contracts.
Monetary policy and interest rates can impact the business cycle. And because of this, there are sectors that are more sensitive to changes in interest rates than others. Sectors such as financials, energy, industrials, materials, and real estate are much more sensitive to interest rates, while sectors such as information technology, communication services, and consumer discretionary, to a lesser extent, are slightly less sensitive to changes in interest rates. Lastly, consumer staples, health care, and utilities are viewed to be much more defensive and aren't as sensitive to changes in interest rates.
Every business cycle and interest rate policy path is different, and so the relative sensitivity and performance of each sector can vary. As portfolio managers, we look at both individual stock characteristics as well as sector positioning to determine overweights and underweights that express both our macroeconomic views, as well as our business cycle viewpoints. Thank you for joining me today, and please tune in for another episode of “Investment Management Foundations.”
This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances. Investing involves risk, including possible loss of principal.
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