Sector Rotation is an adjustment of investment weight by moving money invested in stocks from one industry to another, and the anticipation is analyzed by 2 main indicators; economics and business growth trend of listed companies. The economic condition in a certain period may enable an industry to grow and make higher profits while a chance of another industry to do so is lower.

For example, Standard & Poor’s (S&P) and Morgan Stanley Capital International (MSCI) divide global business into 11 categories, and The Stock Exchange of Thailand classifies it into 28 sectors, based on arranging similar line of business in the same sector. By this way, investors will have a comparative advantage to consider making investment decision.

How Sector Rotation works?

Before using Sector Rotation strategy, investors should know that stock market condition has connection and is a prediction of economic cycle. Thus, an investment plan will work out if investors understand market situation and choose strategy effectively to fit emerging economic condition. Stock market conditions can be categorized in 4 levels.

1. Market Bottom is a predicting sign that economic condition is entering a Recession by judging economic figures that are gradually declining such as, lower volume production, less profit figures of listed companies. Therefore, the stock market at this time fell to its lowest point

2. Rising Market or Bull Market is an anticipation of economics that will be likely to reach Early Recovery phase. Investors believe that listed companies have tendency to grow returns resulting in heavy stock trading and adjustment of both index and trading volume.

3. Market Top is a predicting sign that economics will enter Full Recovery in the next phase because performance and growth of listed companies are explicit, but there’s still no positive factor to market so trading level is slightly moved.

4 .Declining Market or Bear Market is a predicting sign that economics are going into Early Recession. Most investors will sell off their stocks in this period so trading value and stock prices are continuously declining.

If investors understand stock environment and economic cycle, they’ll be able to estimate investment portfolio and adjust investment strategy, especially, selecting business lines to find a chance to create returns or protect risk appropriately. An investment strategy by using Sector Rotation to manage investment assets is as follows

1. Investment in ETF: Exchange Traded Fund (ETF) is a fund focusing on growing returns by tracking SET index of business lines. Fund Managers will select a business line with calculation of data analysis and estimate expected returns, and then offer investors for sale. This method works best for novice investors who don’t have any tool for business analysis of stocks because expense cost is low and not complicated.

2. Asset Allocation: This strategy gives rise to investment weight in each business line according to market condition in certain period of time, economic data, and information of listed companies to make decision. Asset Allocation suits those who have investment experience, in-depth information, an ability in analyzing economic movement and following up the performance of listed companies that reflect the whole picture of business. For instance: during COVID-19 pandemic, the business line that has gained profit is Communication Technology which responds well to the Next Normal, Logistics and Transportation, or Food category, etc.

Investors should find supporting tool to make decision easier about Sector Rotation such as, studying analysis to see an entire picture and trend of that business, and figuring out analysis results and problems that may have positive or negative impact on that business no matter how long it is (The Stock Exchange of Thailand).

After making decision to go for Sector Rotation, investors then need to study about the business line intending to shift in investments. An adjustment in investment portfolio can be gradually made in all or parts. Also, keeping track of investment issues in your business investment whether there’s any concern in each period of time. If some warning signs appear, take them into consideration promptly, and make decision if Sector Rotation should be repeated once again.