ISA investors jump on the Brexit bandwagon

With personal investors having to navigate around volatility courtesy of a number of political events, Ian Forrest, investment research analyst at The Share Centre, comments on which sectors ISA investors favoured in 2016.

ISA investors jump on the Brexit bandwagon

Sector analysis within ISAs is always very interesting as it gives an insight into investor activity on a general basis.

Interestingly, in 2016 the most popular sector, based on the number of trades made within ISAs by customers at The Share Centre, was the Mining sector. I say interestingly because previously the sector has featured in this top spot on the back of heavy losses and subsequent sales of the stocks.

However, over the past twelve months there has been a good recovery story and the evolving demographics of rising populations, urbanisation and consumerism in emerging nations underpins the long term support for a whole range of commodities. Furthermore, this was a sector not directly impacted by the Brexit vote as despite firms being listed in the UK the majority of companies have operations internationally.

Interested investors should appreciate that groups in this sector are focussed mostly on growth however some of the larger miners have historically paid decent dividends, although that is unusual in the sector at present.

Oil and gas

Expectedly, as a result of the increased oil price and the subsequent positive effect on companies, it was inevitable that the second most popular sector amongst ISA traders was the Oil & Gas sector. Investors should appreciate that oil prices have recently stabilised as the imbalance between supply and demand was significantly steadied by the OPEC members’ decision at the end of 2016 to cap production at around 33 million barrels of oil per day. This outcome may give companies the confidence to resume exploration and spending on infrastructure again.

It may also lead to some of the larger companies considering making acquisitions to sustain their reserves. Interested investors may wish to note that Royal Dutch Shell and BP will more than likely continue to pay attractive dividends, but naturally due to the volatility there is a higher level of risk linked to the sector.

Banking

The third most popular sector was the Banking sector which still remains in the economic and market spotlight as it attempts to repair reputational damage suffered since 2008. It was once again thrown into the limelight after the Brexit vote with companies in the sector fairing the worst in the immediate aftermath of the vote, possibly explaining why the sector features on this list.

Nevertheless, savvy investors that saw this fall off as an opportunity could have benefited as the sector has now bounced back with some companies above pre-Brexit levels.  Other reasons it could be on investors’ radars include the prospect of interest rates rising in the UK and the US and a slow and steady recovery by many companies in the sector.

Investors should note that a sector which was once a favourite for income seekers has seen much of the dividend flow taken away, although there is evidence of some companies returning to meaningful dividend growth, such as Lloyds.

Construction

The Brexit vote is likely behind the reason why there has been a surge of interest in the Construction sector for ISA investors in 2016. Housebuilders fell back after the EU Referendum but house prices have actually coped well since then, partly as a result of the economy being stronger than the market had anticipated. Combine this with the significant prospects for infrastructure in the US and the UK, the support from the government in relation to the Help To Buy scheme as well as relatively low interest rates and strong demand, investors are demonstrating that they have identified opportunities within the sector.

Travel

The Travel & Leisure sector remained popular amongst ISA investors in 2016. Following the EU Referendum, market sentiment towards the sector became mixed. The fall in the pound, increased uncertainty around the future trading arrangements with the EU and the potential impact on the UK economy created volatility for some companies, whilst others have been largely unaffected and some firms have actually benefited.

As an example, whilst airlines like easyJet have not performed too well, tour operators such as TUI have done better than expected. Still, both of these have attractions with one of the companies paying a good dividend and the nature of the other business being very cash generative which is attractive for income seekers.

What can investors expect in 2017?

There are a number of known events that could increase volatility in 2017. Given that at the start of 2016 it seemed unlikely that we would see a Brexit vote or Donald Trump elected, it is worth bearing in mind that further surprises can’t be ruled out in 2017. These include, a faster pace of US interest rate hikes, an oil price rise increasing the strength of expected inflation.

We believe that sector selection will be a key aspect for investors in 2017, as sector rotation from defensive to more cyclical stocks became an important factor towards the end of 2016. Sectors that we like include healthcare, financials, technology and consumer discretionary.

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