The 11th Sector

Back in 1999, MSCI and Standard & Poor were working on something that would change the stock markets as we knew them. As everyone else worried over the Y2K bug, they were feverishly working to launch the Global Industry Classification Standard, a way of dividing the stock markets into easy apportioned groups of companies. There are 10 sectors, 24 industry groups, 67 industries and 156 sub-industries, into which all publically owned companies are divided.

In addition, more money is likely to flood into the sector, with JPMorgan Chase reporting estimates of as much as $100billion being invested in the market.

Those sectors have been in use ever since, and have been adopted by many stock markets internationally. They are as follows – Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecommunication Services and Utilities. It’s been that way for 17 years, but on 31st August 2016 we are getting an 11th sector – Real Estate.

But hasn’t it always been there?

Real Estate has always factored in the market. In fact, until the changes are made by MSCI and S&P, Real Estate will remain where it has always been – a subsection of Financial. But now, as Real Estate in its own right is becoming more and more of an investment focus, we are about to see it get its own sector. And that’s important for two reasons…

Firstly, portfolios will need to be rebalanced. That is going to push a lot of volatility into the markets, as asset managers and investors struggle to rebalance. It will mean a kick start to the markets after the summer lull, and may present some interesting investment opportunities.

In addition, more money is likely to flood into the sector, with JPMorgan Chase reporting estimates of as much as $100billion being invested in the market. Either way, that will make for an interesting September in the markets.

The second reason the addition of Real Estate is interesting is because it could push up prices for housing developments at a grassroots level. Essentially some fear that the moves to create a new sector may push up the price of housing, as more people clamor to make money from Real Estate (adding to the hoards who already do). Although, admittedly that is more of an abstract issue and won’t directly affected investing.

So what should I do?

The introduction of the 11th sector is expected to mostly affect portfolio managers, for the simple fact that many are under weight in financials as it is. The addition of Real Estate in its own right will mean that they will have to rebalance in order to spread their investments accordingly. If that rings true for your strategy, maybe a little shuffle will be in order.

Another thing that should be considered is the Federal Reserve’s likelihood to raise interest rates this year. At the moment we are expecting that to come in December, and if that happened stocks that pay dividends could be adversely effected.

Other than that, there will be little change in the day to day of the market. Reporting will be a little more specific, but that’s about all we are likely to see in the long term.

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