In our last article, we noted that international equities will add diversity to your portfolio. This week, we would like to take you further into our discussion as we explore the realm of the US equity market.

The US equity market provides a greater degree of diversity in comparison to the local market. There are 11 sectors represented in the S&P 500 Index compared to the six sectors available locally. Three sectors in the Trinidad and Tobago Stock Exchange (TTSE) represent 90 per cent of the local market capitalisation versus the S&P 500 Index, where the largest sector, Information Technology, accounts for approximately 17 per cent of the index (see exhibit 1). Bloomberg analysts' expectations are for the S&P 500 Index to appreciate another 4 per cent from its current level to 1344 by December 31, 2012. The index has appreciated 4.8 per cent year to date.

Like most developed markets, the US market did not escape the events of 2011 that plagued the world economies. However, amongst its developed peers, the US benchmark, the S&P 500 Index, managed to scrape through the turmoil and end the year flat, due in large to its defensive sectors.

The year 2011 proved to be the year of the defensives. Amongst the 11 sectors in the S&P 500 Index Utilities, Consumer Staples and Healthcare all rallied throughout the year, buoying the index. Utilities appreciated 14.8 per cent last year whilst consumer staples and healthcare increased 10.5 per cent and 10.2 per cent respectively (see exhibit 2). On the other end of the spectrum; financials, materials and industrials continued to weigh heavily on the market, erasing the gains of the other sectors, causing the index to end flat for the year.

Source: Bloomberg; Bourse

Last year's market performance definitely reiterated the fact once more, that sector allocation and careful stock selection plays a crucial role in the performance of your portfolio. As we continue to help you position your portfolio for the rest of 2012, let us explore a few sectors that may make or break you in 2012.

Consumer Staples Sector

We are almost certain that all of us would have heard of a little brand called Pepsi or even its rival Coca Cola. How about Colgate toothpaste or even Kraft's Macaroni and Cheese? The Consumer Staples sector comprises companies that manufacture and sell food/beverages, tobacco, prescription drugs and household products. This sector has proven its ability to weather the storm, outperforming the benchmark three times within the past five years (see exhibit 3). However when the rainbow emerges after the storm, it is clear that historically, Staples has not been able to compete with its benchmark's performance (see exhibit 3).

The Consumer Staples sector has the highest yielding dividend stocks in the S&P 500 Index with the sector yield averaging around 3 per cent. Bloomberg analyst expectations are for earnings in this sector to grow by 10 per cent in 2012. However, analysts at Barclays expect the sector to lag in performance against the Technology and Energy sectors in 2012 and maintain an equal weighted position against the S&P 500 Index.

Source: Bourse; Bloomberg

Information Technology (IT) Sector

Names such as Apple, Microsoft and Google should flood our minds as we discuss this sector. In 2011, although not the best performer of the year, the IT sector outperformed the S&P 500 Index, appreciating 1.3 per cent. Investors are provided with a plethora of opportunities for investments within this sector. As with any sector, stock selection is key. However, investors have an added advantage of familiarity in the IT sector. From our computers at home to our credit cards in our wallet, some of the biggest household names belong to this sector. Analysts at Barclays, Credit Suisse, Standard and Poor's and Morgan Stanley all hold an overweight position in this sector. Despite some concern that the sector could be affected by slowing growth in the emerging markets, innovation and constant expansion of some of these tech giants will continue to drive performance in 2012.

No investor can speak of innovation and expansion without mentioning Apple Inc. From the iPod to the iPhone, innovation and technological advancements have become synonymous with the word Apple. As the saying goes "an apple a day keeps the doctor away" and indeed Apple stocks kept portfolios healthy as the stock made a photo finish at the end of 2011, appreciating 25 per cent. Already Apple has created sparks in the market this year as its stellar 2011 fourth quarter earnings report led to the tech company gaining the position as the largest company based on market capitalisation.

Financial Sector

The Financial sector suffered tremendously last year, depreciating over 18 per cent and bestowing on Financials, the title of worst performing sector in 2011 (see exhibit 2). The European crisis and debit limit chaos in the US, led this sector to its bleak performance last year. Financials are expected to remain a landmine in 2012 as themes that affected the sector in 2011, are expected to remain present this year. On the domestic front, analysts at Standard and Poor's expect sluggish loan growth and decelerated new mortgage data to infringe on the recovery of this sector. The real question for financials remains, has any diamonds formed from the heap of coal that was put under pressure in 2011?

Last year Bank of America (BAC) fell approximately 60 per cent. Although we are only a few weeks into 2012, it is clear that BAC has a head start, appreciating 31 per cent for the year thus far. Like the sector in which it resides, this stock's year end performance will depend greatly on the outcomes and decisions made in Europe.

Recommendation

The investment theme always remains diversity; asset diversification, geographical diversification and sector diversification. For those of you who are already invested in the US market remember to maintain a well-balanced portfolio with exposure to the different sectors. For those seeking diversification we do recognise that for many investors there are several hindrances to investing in the US market. Whether you have sufficient cash to create the level of diversification or simply accessing stocks in the US market, these obstacles should not prevent you from creating the necessary diversification needed. Mutual funds are a great investment vehicle for adding the necessary diversification needed in any of your portfolios. There are many US mutual fund providers available locally of which Bourse is one. Contact your broker or advisor to be guided accordingly.