What works best – investing in sectors or countries?

A diversified portfolio across regions and sectors can offer healthy returns at a lower risk, partly because the negative performance of some constituents can be offset by the positive contribution of the best performers. One way in which investors generally try to outperform financial markets is by investing higher portions of their invest­able funds in countries whose economies are ex­pected to outpace the average glo­bal growth while reducing ex­posures in countries that are expected to face weaker economic cycles.

While this is a very pragmatic approach, it is worth noting that identifying and investing in the right sector can also generate a strong investment return compared to country selection.

As different countries and re­gions are exposed to different economic conditions, open markets and globalisation allow companies in the same sector to gene­rally be impacted by the same dynamics, irrespective of the company’s own country of domicile. There are many determinants of stock performance that ultimately drive a sector to fare better compared to its peers. As a matter of fact, a change in the price of oil and fuels generally affects airlines across the globe, while a...