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FTSE 100 Sector Rotation: Cyclical shift or long term trend?

FTSE 100 Sector Rotation: Cyclical shift or long term trend?

By: Catherine Yoshimoto, Sr. Index Product Manager

For the first time in over 10 years, the weighting of the financials sector in the FTSE 100® Index fell below that of the consumer goods sector at the end of February, just before quarterly review results were announced. This brief sector rotation made headlines in the UK as it was believed to highlight the struggles that financial services companies have faced since the global financial crisis. But was this just a temporary cyclical shift or a reflection of a longer-term trend?

As illustrated below, the performance breakdown by sector in the FTSE 100 Index over the past 12 months reveals the role that performance played in this rotation. Over this period the consumer goods sector was the highest performer while the financials sector was the penultimate underperformer in the index for the same period. In a market cap weighted index like the FTSE 100, this was certainly a major driver of the recent weighting shift. 
 

FTSE 100 Index 12-month Total Return by Sector, March 1, 2015 to February 29, 2016

In addition to recent sector performance, we can also examine how the longer term FTSE 100 industry weights have shifted over the last 10 years. By examining the index sector weightings from pre-financial crisis in February 2006 to those of 2011 and 2016 we can see whether there has been a temporary or long term trend at work.

The chart below clearly indicates that in the wake of the global financial crisis, the weight of the financials sector had already dropped to its current level in the FTSE 100 by 2011. This 8% decline occurred even while the number of stocks included in the sector was roughly the same. This makes sense when you consider that during this time the total market value of the financials sector declined over 20% compared with an 8% increase for the FTSE 100 as a whole.

FTSE 100 Index – ICB Industry Weights (%)

From 2011 to today, the largest weighting shift has not occurred in financials but is instead seen in the consumer goods, oil & gas and basic materials sectors. The decline in the weight of oil & gas coincides with the steep fall in oil prices. Similarly, the basic materials sector was the hardest hit from a performance perspective which has led to its current weight being about a third of what it was five years ago. 

Based on the data over the last 10 years, therefore, it seems that the financials sector weight has remained relatively stable. The recent sector weight rotation simply reflects the performance differential between consumer goods and financials over the past year. While financials’ brief rotation out of the largest sector weight in the FTSE 100 is new, the trend is not – if the weights of financials and consumer goods sectors continue to be fairly even, shifts like the one in February could be the new normal depending on performance of these sectors.

For more information on the FTSE UK Index Series Quarterly Review, click here.

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