Natural long term cycle of sectors

Understanding the All Country World Index (ACWI)

The All Country World Index (ACWI) is an important measure that tracks the market capitalization of various sectors globally. The ACWI is an MSCI index that includes around 3,000 stocks from 45-50 countries, giving a comprehensive overview of how different sectors contribute to the global market. It is a tool that helps investors see the bigger picture of the world economy, including the United States, Japan, and other major markets. There are other indices that exclude certain countries, but the ACWI includes all, making it a unique and valuable resource for understanding global market trends.

Sector Shifts Over the Last 30 Years

One of the key insights from the ACWI is how the market cap of different sectors has shifted over the past 30 years. For example, around the year 2000, sectors like technology, telecom, and healthcare dominated the global market, making up 44% of the total market cap. However, by the time of the Lehman crisis in 2008, this percentage had dropped to 24%. Today, these sectors are back at 44% of the global market cap. This cyclical pattern highlights how sectors rise and fall in importance over time, reflecting changes in technology, consumer demand, and global economic conditions.

The Cyclical Nature of Market Caps

Contrasting the rise of tech, telecom, and healthcare, we see a different pattern with financials, energy, and materials sectors. When the tech and telecom sectors were at their peak in 2000, financials and related sectors were at a low, making up only 24% of the market cap. However, as tech and telecom declined, financials and energy surged, reaching 44% of the market cap by the time of the Lehman crisis. Today, these sectors have again dropped to around 24-25%, suggesting that these market cycles are quite regular, occurring every 8-10 years.

What This Means for Future Trends

If these cyclical trends continue, it may indicate that the technology, telecom, and healthcare sectors have reached a peak, and we might see a decline in their global market share in the near future. However, it’s important to note that this trend may not apply uniformly across all regions. For example, even if global tech starts to slow down, Indian tech companies could continue to perform well due to their role in providing services and support to other countries. Similarly, if sectors like financials, energy, and materials begin to rise globally, Indian companies in these sectors might also see growth.

The Importance of Sector Rotation

This analysis highlights the importance of being flexible and adaptive in investing. Instead of sticking with a single sector or stock, which may go through long periods of underperformance, investors might benefit from rotating between sectors based on where the growth is happening. By moving investments from one sector to another as market conditions change, it’s possible to capture gains across different cycles, rather than being stuck in a declining sector.

Natural Market Cycles and Momentum Investing

The patterns observed in the ACWI demonstrate how markets naturally move in cycles, with different sectors taking turns to lead or lag. This concept aligns with the idea of momentum investing, where portfolios are adjusted to favor the sectors and stocks that are currently performing well. By following these natural cycles, investors can potentially achieve better returns by focusing on sectors that are in their growth phase while avoiding those that are in decline.

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