So far this year, the FTSE 100 index is broadly flat. It started January around 7,500 points and closed Friday at 7,516. However, various sectors within the index have performed differently. So when thinking about where should I invest, it’s important to note the areas that are outperforming the benchmark so far in 2022.
Banking surges on rate hopes
The hottest and best-performing sector at the moment is banking and finance. Over the past month, two of the top five individual performers are banks, Standard Chartered and HSBC. Other banks have also posted positive returns in the short term.
The main reason why this sector is hot right now is due to a shift in expectations from investors about interest rates. The Bank of England raised interest rates both in December and last week. Expectations are now for two or three more hikes this year. Higher interest rates benefit banks. They allow a higher net interest margin to be made. This measures the differences in rates charged on loans versus rates paid on deposits. A higher base rate gives the banks more flexibility in building a buffer margin for themselves. But of course, I have to remember that banks haven’t always been great performers. in recent years so I need to have faith in their prospects long term, rather than buying with a short-term outlook.
A commodity rally helping the sector
Another hot sector right now is commodity stocks. When considering where should I invest, I definitely want to have some exposure here. WTI Oil broke above $90 per barrel last week, the highest since early 2020. We’ve also seen other commodities enjoying a strong start to the year. This has enabled companies like Shell to see an 18% share price rally in just the past month.
Again, I do need to be careful when just looking at short-term performance. I’m aware that commodity stocks are volatile, so I’d prefer to have only small exposure in my portfolio.
Crash fears boosting defensive stocks
A third hot sector where I could invest is consumer staples. Stocks such as J Sainsbury, Aviva and British American Tobacco have all done well recently. In my opinion, the reason for this is due to fears around a stock market crash. If I’m thinking about where I should invest but am concerned about a possible correction, consumer staples are key.
Typically the demand for the products and services offered (groceries, insurance and tobacco) won’t change much regardless of the state of the economy. As a result, investors typically pile into these kind of stocks during periods of uncertainty.
Personally, I don’t see a crash imminently, having reviewed my warning signs checklist.
Thinking about where I should invest
Each sector has pros and cons depending on my existing portfolio and personal preferences. The main point is that sectors are hot for specific reasons. If I think the underlying causes could continue this year, then it’s worth me considering buying some companies from that area.
Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended British American Tobacco, HSBC Holdings, and Standard Chartered. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
