Your guide to ASX market sectors

Shares on the ASX are divided into sectors based on their similar business operations or revenue sources.

As an investor, you can use an understanding of ASX market sectors to better analyse stocks and build a well-diversified share portfolio.

What are the ASX share market sectors?

The ASX is broken down into 11 industry sectors using the Global Industry Classification Standard (GICS). The 11 sectors are energy, materials, industrials, consumer discretionary, consumer staples, healthcare, financials, information technology, communication services, utilities, and real estate.

The GICS is a globally accepted method for stock market industry categorisation introduced in 1999 by leading market index provider MSCI Inc (NYSE: MSCI) and credit ratings agency Standard & Poor’s (now known as S&P Global Ratings or S&P).

Why are they important?

The GICS is more than just a boring old method of financial classification. It is a helpful lens through which to analyse the component parts of the economy and assess its overall health. It can also be a valuable tool to use when thinking about how to best diversify your portfolio.

This is because the GICS splits the stock market into groups of companies with similar business activities. Companies that operate similar businesses will tend to respond to economic events (like a sudden rise in the price of oil, for example) in similar ways.

But companies with different operations that are grouped into other sectors might respond to those same events in different (and perhaps even opposing) ways.

This is important because it means that if you combine shares from various industry groups into one share portfolio, you might be able to mitigate (or hedge against) certain economic risk factors.

For example, when interest rates are higher, and money is tight, companies in the consumer discretionary sector may see their profits decline. However, those in the consumer staples sector may see profits increase as consumers spend more of their paycheques on cheaper options.

Therefore, if you are concerned about the risks to the health of the economy (and the share market!) from rising interest rates, it could make sense to invest a little more of your money in consumer staples shares to reduce your risk exposure.

And that’s the whole point of diversifying! So, let’s take a closer look at each ASX market sector and see how you can use them to your advantage in your share portfolio.

The 11 ASX market sectors

Using the GICS, the ASX is divided into 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

We explore each sector below and provide examples of the largest companies in each based on their market capitalisation as at 17 November 2022.

1. Energy

The energy sector literally powers the economy. It includes all companies involved in the production and supply of consumable energy — namely oil, gas, and coal. Renewables are classed as utilities.

This sector includes the mining and drilling companies that produce raw energy and those that build the equipment and infrastructure required to extract and transport it.

Whatever their specialisation, all companies in this sector depend on the price of raw energy to generate their profits.

2. Materials

This sector produces the raw materials used by the rest of the economy to produce goods and services.

Materials is one of the largest ASX market sectors. It includes the mining and exploration companies that produce precious metals such as gold and silver, industrial metals such as iron ore and copper, battery-making materials such as lithium and nickel, and rare earths (among many others).

The sector also includes chemical companies that produce fertilisers and industrial gases, as well as companies that produce construction materials like bricks and steel. It even encompasses timber companies, paper mills, and companies that produce plastics, containers, and other packaging.

The materials sector depends on strong commodity prices and a healthy economy for its revenues.

3. Industrials

The industrials sector comprises transportation and logistics companies (including commercial airlines), machinery and construction companies, and commercial and professional services companies (like waste management and human resources).

This sector tends to perform particularly well when the economy is expanding and demand for construction and professional services is high.

However, some companies in the industrials sector also display defensive characteristics. This means demand for their products remains relatively high even during a downturn or a recession.

4. Consumer staples

Companies in the consumer staples sector sell necessities like food, beverages, and other household items and personal care products. As you’d expect, the largest companies in this sector are typically supermarket chains.

Consumer staples are usually considered to be defensive shares. Because they sell the basic necessities, these companies still generate relatively consistent profits even when the rest of the economy is struggling.

5. Consumer discretionary

If consumer staples are the necessities required to get us through daily life (like food), consumer discretionary is all the extra fun stuff we want on top of that.

Think electronics (like TVs and smartphones), jewellery, cars, and luxury items like designer clothes. Consumer discretionary also includes hotels, restaurants, and other tourism and leisure companies.

This sector tends to be highly cyclical in nature. This means consumer discretionary will most likely underperform other sectors in a downturn. The reasons are pretty obvious — luxury items are one of the first things households will cut their spending on when money is tight.

6. Healthcare

The healthcare sector consists of pharmaceutical and biotechnology companies and healthcare providers like clinics and hospitals.

It also includes companies that build medical equipment and supplies — everything from sleep apnoea machines to rubber gloves to high-grade hospital disinfectant devices.

While some healthcare companies are highly speculative — such as junior biotech companies — other more established healthcare companies are considered defensive blue chips.

7. Financials

The ASX financials sector is dominated by the big four Australian banks and includes insurance companies and other financial service providers. Exchange-traded funds (ETFs) and other listed investment companies (LICs) also fall under this category.  

If you are concerned about the risks to the broader economy from rising interest rates, companies in the financials sector can be good shares to own. Banks and insurance companies, in particular, tend to see their profit margins expand as interest rates go up.

8. Information technology

Colloquially referred to as ‘tech stocks‘, the information technology sector includes all those exciting and innovative companies that are researching, developing, and commercialising different technologies.

The sector comprises software developers, hardware designers, and smartphone engineers. But the tech sector isn’t just limited to gadgetry; it also includes cybersecurity, artificial intelligence, research and analytics, payments platforms, and companies that manufacture semiconductors.

The tech sector is commonly seen as a high-risk, high-reward area of the share market. This is because many of the most exciting tech stocks have yet to prove they can reliably turn a profit.

9. Communication services

Most Australians would probably associate communication services with major telcos like prominent ASX blue-chip Telstra Corporation Ltd (ASX: TLS).

However, the communication services sector is much broader than that. It covers companies involved in media, entertainment, marketing, and advertising, including online classifieds companies like Carsales.com Ltd (ASX: CAR)

10. Utilities

The utilities sector includes companies that take the raw energy created by the energy sector and distribute it to people’s homes and businesses. Utility companies address our basic needs for electricity, heat, and water.

Recently, utilities have broadened to include renewable energy companies, like those that use wind, solar, and water to generate power.

11. Real estate

This ASX market sector includes real estate investment trusts (REITs), which own, lease, and manage property investments.

It also includes companies that own and operate shopping centres, retirement villages and other residential communities, and even companies like Stockland Corporation Ltd (ASX: SGP) that develop new town centres and other prominent real estate projects.

Property shares can provide investors with a stable income stream, in addition to any capital appreciation from increases in the share price, due to the rents many of them collect on their properties. These are paid out to investors through regular dividends or distributions.

How to use ASX market sectors to your advantage

As we discussed earlier, understanding how the different market sectors perform in various economic conditions can help you build a successful and well-diversified investment portfolio.

For example, if you believe interest rates will continue to rise, you might consider buying more shares in the financials sector. If you are more concerned about protecting your portfolio from a potential recession, you may invest in more defensive sectors, like consumer staples or utilities.

Remember that portfolio construction aims to strike the right balance between risk and reward. You can use your knowledge of the riskiness of different ASX market sectors to build a diversified portfolio with a risk level that’s right for you.

ASX market sectors can also help when you are analysing individual companies. Sometimes, to properly assess a company’s performance, you need to compare it against its peers. Other companies of a similar size within the same market sector are perfect for this purpose.

Doing a sector analysis like this helps you quickly determine whether a company is punching above its weight in its sector — and whether it might make a good investment.

Best and worst sector performers in 2022

In 2022, the best-performing sector by far has been energy. The ongoing war in Ukraine has caused major supply-side issues and has driven up the prices of natural gas and oil.

As of 17 November 2022, the S&P/ASX 200 Energy Index (ASX: XEJ), comprising the largest energy stocks on the ASX, has risen 47% this year. This contrasts with the broader S&P/ASX 200 Index (ASX: XJO), which has recorded a drop of 4% over the same period.

The utilities sector has also lived up to its defensive name, with the S&P/ASX 200 Utilities Index (ASX: XUJ) up more than 21% so far in 2022.

But with the economic outlook becoming increasingly uncertain, investors have been dumping growth stocks. This means the tech sector has been punished the most, with the S&P/ASX 200 Info Tech Index (ASX: XIJ) down by more than 31% since the start of the year.

Rising interest rates have also hurt the property markets, with the S&P/ASX 200 A-REIT Index (ASX: XPJ) down by more than 22%.

Which sectors do well in bear and bull markets?

In the finance world, a bear market typically refers to a sustained drop in the value of the market by at least 20% from its peak. A bear market typically coincides with a general downturn in the broader economy, such as during a recession or depression.

It is generally accompanied by low consumer confidence, high or increasing interest rates, low economic output, and usually a pervasive sense of pessimism about the overall state of the economy.

The opposite of a bear market, a bull market is a sustained rise in market prices. It is usually accompanied by optimism and excitement about the economy’s future potential. Borrowing costs are typically low, business activity is high, and the economy is heating up.

These are the ideal conditions for growth shares like those in the tech sector and some parts of the healthcare and property sectors. These company types are often highly leveraged and are more likely to outperform when interest rates are low and investors are excited about the future.