There are 11 investment sectors on the share market. This is what moves them.

by

Jack Derwin

June 3rd 2022 3 minute read

We often talk about the ‘market’ as a whole but in reality it’s a sum of its different sectors. Each stock market sector groups together individual companies and helps investors understand specific movements and trends. 

Today we’re going to briefly explain the 11 main sectors, what they are and the factors that help push them higher or lower.

1. Information Technology

Usually just referred to as the technology or tech sector, IT covers the software, hardware and semiconductor industries and represents the single largest proportion of the U.S. share market. At the start of 2022, it made up more than 28% of the S&P 500.

This shouldn’t be a surprise with names like Apple, Microsoft and Google ranking as some of the most valuable companies in the world. 

Big tech valuations however are often based on the assumption of significant future growth. This means the sector may rally more strongly than other sectors during periods of growth and be hit harder during market corrections. 

While not home to nearly as many household names, Australia’s tech companies include the likes of Xero, WiseTech, and Altium.

2. Energy

The energy sector covers oil, gas, renewables and other fuels as well as the companies that service and provide the necessary underlying equipment.

In Australia that includes names like Woodside Energy, Santos, Ampol and Whitehaven Coal. Across the Pacific, Exxon Mobil, Chevron and others dominate the sector.

Higher fuel prices tend to benefit the energy sector, favouring periods of economic expansion and the ensuing demand generated by it. It’s also uniquely impacted by the weather and seasons, while severe weather can threaten infrastructure and production. 

Significantly, it is also a sector that has historically performed well during periods of rising inflation. 

3. Utilities

If the energy sector creates it, the utilities sector covers the companies providing power directly to the end user. It’s not limited to electricity and gas however, with the sector also providing water and wastewater services.

On the ASX, Origin Energy, AGL and APA Group are among the biggest energy names on the boards.

Unlike tech, the necessity of utilities throughout all economic cycles makes it a ‘defensive sector’, known for its stability and dividends. On the flipside, they are also often subject to significant regulation which can raise the cost of doing business.

4. Materials

Materials is one of the most mixed sectors of all, encompassing all manner of resources. Industries like mining, metals, chemical, commodity and construction industries as well as packaging and paper are all contained within the same sector. In other words, companies that are involved in finding, developing and processing raw materials. 

Given the makeup of Australia’s economy, the ASX is dominated by some huge materials companies like BHP, Fortescue, Rio Tinto and Newcrest.

The sector is usually quite impacted by fluctuations in the U.S. dollar, the currency in which raw materials are often priced. This can both cyclically affect the fortunes of materials companies in both positive and negative ways

5. Industrials

The industrials sector covers the construction, engineering, machinery and transportation industries as well as those producing building products.

On the ASX, that includes companies like infrastructure group Transurban, construction materials supplier Reece, and airline Qantas.In the United States, the Dow Jones is heavily weighted to big industrials like Caterpillar, Boeing and General Electric.

The sector is heavily affected by a range of factors including defence budgets, infrastructure spending as well as fuel and commodity prices. 

6. Healthcare

Healthcare covers a diverse range of health equipment and service companies as well as pharmaceutical and biotechnology companies.

On the ASX that means biotech behemoth CSL, Ramsay Health Care and Cochlear Limited. On the S&P 500, this covers huge names like Johnson & Johnson, Pfizer, and Merck and Co.

Due to the nature of the healthcare system, it is a sector tied closely to government funding and strict regulation. Major barriers to entry such as patents, high research and development costs and specialised expertise help protect incumbents. Ageing populations in developed countries like Australia and the United States are expected to drive demand for health care products and services. 

7. Financials

The finance sector covers all aspects of the financial system, from banking and asset management to insurance and other financial services.

Again it represents an outsized proportion of the ASX with major banks like the Commonwealth Bank and Macquarie dominating the top end of the board.

In the U.S. JP Morgan, Bank of America and Wells Fargo are household names. 

The sector is closely impacted by monetary policy decisions such as interest rates, and investor confidence which in turn impact the appetite for financial products like credit.

8. Consumer Discretionary

Consumer spending makes up a huge portion of the economy and is generally classified by whether it is discretionary (optional) or a staple (necessary).

The consumer discretionary sector covers retailers, consumer services like hotels, apparel and luxury goods and even the automobile industry.

Due to the wide umbrella, in Australia it includes gaming giant Aristocrat and Crown, retailers JB Hi-Fi and Harvey Norman, pizza chain Domino’s along with travel agency Flight Centre.

On the S&P 500, there’s a long list of companies including Ford, Carnival, Nike, Starbucks, Tesla and Etsy.

Given these companies are fuelled by ‘optional’ spending, the sector is closely tied to economic growth. Higher spending during boom periods helps fuel it while tightened belts during recessions hurt the sector.

9. Consumer Staples

The consumer staples sector naturally is a whole kettle of fish, providing the kinds of products and services people can’t generally do without.

This includes food and beverages as well household and personal products like toiletries. This covers supermarkets Woolworths and Coles, vitamin maker Blackmores and chicken rustler Inghams Group. On Wall Street, you’re talking Walmart, Procter & Gamble, and Kelloggs. 

Given these types of companies produce the kinds of goods that are considered ‘indispensable’, the sector is also considered defensive. The downside of ‘defensive’ sectors is that they generally offer less growth opportunities than others.

10. Communications

The communication services sector is made up of the media, entertainment and telecommunication industries covering advertising, broadcasting, entertainment and mobile services.

On the ASX, this covers Telstra, Nine Entertainment as well as major advertising platforms like REA Group and Carsales.com. Meta, Disney, Fox, Activision Blizzard, Netflix and Match Group all get bundled into this sector on the S&P 500.

Due to its breadth, the Communications sector is often made up of companies that appeal to both growth and income investors. 

11. Real Estate

This sector almost needs no explanation, encompassing all manner of companies and REITs that develop, own, lease, manage, operate and sell property and real estate services.

This covers industrial property giants like Goodman Group as well as commercial real estate names like Dexus and Scentre Group on the ASX.

It also covers REITs, which are publicly-listed investment trusts which hold property assets. This allows investors to gain exposure to property without having to buy it directly, avoiding the high cost of entry of buying a warehouse for example.

The real estate sector is heavily affected by economic conditions, interest rates and government policy and investor appetite.

 

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