Smart ways to make money from sector rotation

financialexpress.com:

Sector rotation refers to selling shares or funds that are invested in one sector and use the money to re-invest into another sector. This strategy helps investors to capitalise on a change in economic conditions and the anticipated performance of those sectors in specific stages of the economic cycle will lead to higher returns.

This sector rotation strategy is a type of an active investment strategy in contrast to so-called passive investing strategies where investors buy the stocks or funds and hold onto it for years.

History has shown that the economy moves through its predictable pattern, so that particular sectors tend to do better than others at certain junctures along the way. For instance, when the economy is growing, companies in business that are sensitive to economic conditions like banking, consumer discretionary sector tend to do very well. On the contrary, firms in so-called defensive sectors, companies that make or sell necessary products like consumer staples, health care, utilities, tend to hold up well in recession.

So, sector rotation works by ‘rotating’ in and out of various sectors to take advantage of changes in the phase of the above business cycle from expansion to contraction. Because some sectors are inherently more sensitive to economic changes than that of others, rotating money in or out of stocks or funds that track those sectors could result in higher returns.

Also Read: 8 key investment strategies for maximising returns

There are four clearly distinct phases of a typical business cycle, namely early cycle phase, mid cycle phase, late cycle phase, and recession phase. Generally, a sharp recovery from recession, marked by an inflection from negative to positive growth in economic activity