We should understand that sector rotation is a broad topic. It is generally for value investors in which they need to use the top-down approach and analyze the sector and every piece of information that’s available about a company.
Tools such as Michael Porter’s five forces, Industry Concentration Ratio can all be used as supplement measures in Sector Analysis.
We should also note that government regulation can also play a huge role in the growth of a sector. The Real Estate Sector and the Power Sector are the sectors where new regulations are coming up regularly. These sectors may or may not provide huge growth opportunities in the future. Like all strategies sector rotation also has its own benefits and drawbacks.
Sector rotation, if done prudently could give investors the opportunity to ride the best period of a particular sector. Exit and entry point matters a lot in this strategy. Also, we must note a contrarian view on the sector could go wrong and leave investors in a soup.
Sector rotation strategy can help investors align their investments with their market outlook. With an understanding of how certain sectors react to the business cycle, investors may be able to optimally position their portfolio.