The Australian stock market is broken down into separate sectors developed by the GICS (Global Industrial Classification).
This sector classification is important for portfolio management purposes as it can show investors where they may be overweight or underweight.
1.Energy
This sector involves companies that are involved in producing energy. It contains oil, gas, and renewable energy companies which are in exploration and development. This sector also includes utility companies providing power to households. Energy stocks usually perform well in high interest rate environments as rising interest rates may mean higher inflation. When this occurs, energy companies will pass on their increased costs to consumers, which can lead to increase in company profits. An example of an energy stock is Santos (ASX:STO).
2.Materials
These companies extract raw materials and process these materials into basic products. Most manufacturing companies use materials from these companies to then produce consumer products, or companies use these products to construct building. This sector is cyclical so it performs best when the economy is strong and there is demand for materials for building. Some examples are BHP which is involved in exploration, production and processing of coal, iron ore, copper and manganese ore.
3.Industrials
The industrials sector contains companies which take raw materials and then process these products to make finished products or they are sent off for further processing. These companies include manufacturing and construction companies. This sector benefits when the economy is growing as demand and activity is high for these companies. Examples of industrial companies are Amcor (ASX:AMC), which is a company involved in the manufacture of packaging products.
4.Consumer Discretionary
These companies involve the sale of non-essential goods or services to consumers. As these products are non-essential, the demand for these product increases when the economy is strong as households have more disposable income to spend. Example of these are Domino’s Pizza (ASX:DMP).
5.Consumer staples
These companies are involved in selling essential goods and services to consumers. When the economy is soft, these stocks do well as consumers will buy products regardless. An example of a company in this sector is Woolworths (ASX:WOW) as people will always need to shop for groceries. These companies do not necessarily perform well when the economy is strong as investors will rotate their positions into other stocks which are performing better.
6.Healthcare
These are companies that are involved in healthcare either through providing a product or service. Health care stocks do well in the recession stage as consumers will always need to buy medicine or use healthcare services. An example of a healthcare is Ramsay Health Care (RHC:ASX) which operates private hospitals.
7.Financials
This sector is comprised of companies which provide financial services. These include banks, investment banks, insurance companies, real estate brokers, consumer finance companies, mortgage lenders, and REITS. An example is Flexigroup (ASX:FXL) which provides financing to consumers and businesses. The financial sector in general makes more money when interest rates are high.
8.Information Technology
Stocks in this sector comprise of companies in information technology which develop or distribute technological products and services such as producing software and hardware. Examples of this is Wisetech (ASX:WTC), which provides a software to assist the logistics industry. IT stocks do well when the economy is doing well as demand for IT services increases.
9.Communication services
This sector includes companies in the telecommunications industry connecting communications through phone or the internet. Some of these companies are telephone operators and internet service providers. Some examples include Telstra (ASX:TLS) which provide phone and internet services. This is a defensive sector so it does well in economically fragile environments.
10.Utilities
These are companies which provide basic household services such as water, electricity, and gas. An example of a stock in this sector is AGL Energy (ASX:AGL). They sell natural gas and electricity to consumers. This sector performs best when rates are low and investors are attracted to their higher paying yield.
11.Real Estate
These are companies or property trusts which buy residential, commercial or industrial real estate for rental income. An example of a stock in this sector is Goodman Group (ASX:GMG). High interest rates impact this sector negatively as these property trusts are highly geared.
Lauren Hua is a private client adviser at Fairmont Equities.
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