Sector & Region Outlook: August 2011

Published on by on August 2, 2011 | Updated August 23, 2011

Ticker Sector Forward P/E Div. Yield
XLF Financial 11.8 1.65%
XLB Materials 12.9 3.38%
XLV Health Care 11.9 1.85%
XLU Utilities 13.4 3.95%
XLP Consumer Staples 14.8 2.69%
XLI Industrial 14.1 1.91%
XLE Energy 12.3 1.37%
XLY Consumer Discretionary 15.5 1.47%
XLK Technology 13.2 1.36%
*Source: as of 7/28/11

For investors looking to identify sectors of the U.S. economy that may be poised for relative outperformance, we present the ETF Database sector grid, highlighting the forward-looking price-to-earnings ratios of each of the nine sector SPDRs.

Last month, defensive sectors held their ground fairly well while the rest of the pack saw their pricing multiple broadly decline as volatility was rampant across the stock market. Multiples rose modestly in the second half of August, thanks to optimism surrounding the debt-ceiling negotiations coupled with some blowout earnings results from several industry leaders. However, at the end of the month the energy sector was the only one that saw its forward valuation jump, suggesting that stocks as a whole are cheaper now than they were at the beginning of the month.

The industrial sector was hit the hardest, and its pricing multiple slid by nearly a full point after a string of worse-than-expected economic data throughout the month. Financials and health care also saw their multiples drop by almost half a point as investors were reluctant to pour into riskier corners of the equity market. Materials and technology surprisingly held their ground  much like the “safer” utilities and consumer staples sectors.

For yields, utilities continue to lead the way and remain close to breaking through the elusive 4.0% barrier. In second place is still materials as the sector is now yielding 3.38%, a small jump from last month. On the other side of the spectrum, financials saw their yield jump to 1.65%, surpassing the tech-sector, which is now the lowest yielding corner of the market. As a whole, yields largely remain under 2% with only three sectors exceeding that level at this time.

Region Outlook

ETF Region Forward P/E
SPY U.S. 12.9
FEZ Europe 9.5
DGT Global Developed 11.1
CWI Global ex-U.S. 11.4
GMM Emerging Markets 10.9
*Source: as of 7/29/11

Although Wall Street fought its way up to close out the month, pricing multiples for most regions declined as investors outlook was largely one of uncertainty. The debt-ceiling dilemma at home pushed domestic equities lower and the forward P/E of the U.S. slid by 0.1 less than that of Europe’s. Risk levels remain escalated overseas in the Eurozone however, and emerging markets are more than a full point above FEZ, and slowly approaching the forward P/E of DGT.

Lastly, despite increasing fear of a possible U.S default given the debt-ceiling drama in Washington, the U.S. is still the most expensive from a forward P/E perspective, suggesting that many investors are still worried about investing in emerging markets as well as the European debt situation.

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