A breakdown of economic sectors for novice stock market investors
A sector is a group of companies with similar business models. Market sectors are regulated by the Global Industry Classification Standard (GICS). That is, we are not going to talk about my own understanding of the market right now. We are going to discuss the classification that the smart guys with the beard came up with.
Why do you even need to know about these sectors?
To diversify. To choose assets from different sectors to reduce risk.
To make asset selection easier. You can compare companies within a sector rather than within a market.
To be able to make adjustments for the current phase of the economic cycle
What sectors are there?
Energy (which is how the smart guys called the oil and gas sector for some reason).
This sector includes: oil, gas, coal and the equipment for all of this.
An example in the American market: Exxon Mobil (XOM), PetroChina (PTR), Royal Dutch Shell (RDS.A), Devon Energy (DVN)
Lowest yield in the US market, but highest dividend: 3.8%. The sector is risky. Share prices depend on commodity prices. They also depend on OPEC deals, market conditions, and Trump’s tweets (bless his memory). In general, this sector is hard to predict.
- Materials (raw materials sector).
The sector includes: chemicals, agricultural materials, plastics, building materials, packaging, precious and industrial metals and minerals. It also includes gold miners.
Market examples include Alcoa (AA), WestRock (WRK), Du Pont (DD), Mosaic (MOS), Sherwin-Williams (SHW).
There are several funds for this sector, but all of them concern gold miners. For example, FinEx Gold (FXGD) or Tinkoff Gold (TGLD), VTB Gold Fund (VTBG)
The sector is cyclical and quite diverse. For example, environmental packaging is likely a trend for the future. Metals are falling in a crisis, while gold is rising. Therefore, it is difficult to draw unequivocal conclusions.
Industry
The sector includes: aerospace, airlines, marine transportation, trucking, machinery, railroads.
Examples in the American market: Boeing (BA), General Electric (GE), Lockheed Martin (LMT), Caterpillar (CAT), Danaher (DHR).
The sector is also quite cyclical and depends on market conditions. It is not uncommon for companies in this sector to have high debt burdens. Also, the sector often enjoys the support of the government.
- 4. Consumer Goods of Daily Use.
This sector includes: things that people need no matter what the market conditions. Food, drink, alcohol, tobacco, cosmetics, and supermarkets where you can buy all of these products.
Examples in the American market: Wal-Mart Stores (WMT), Procter & Gamble (PG), Tyson Foods (TSN), Philip Morris (PM), Costco Wholesale (COST).
This sector of the market can be used as a defensive asset. It is not cyclical, but it is not growing very fast either. People will buy bread during the crisis, but they will not eat more bread during the economic growth.
- Consumer goods in selective demand
And here is what people buy when the basic necessities are closed: cars, motorcycles, clothing, luxury goods, hotels, restaurants, wedding services, and cruises.
In 10 years, this sector has shown 382% growth, thanks in large part to Amazon
Examples in the marketplace: of course Amazon (AMZN), Alibaba (BABA), McDonald’s (MCD), Nike (NKE), Carnival (CCL).
This is a cyclical sector, and grows well only after the crisis, when people’s income rises. Of course, as long as people do not have salaries, they temporarily postpone the dream of cruises.
- Health
This is a huge sector, including drug developers, suppliers of medical equipment, health insurance and biotechnology.
It is the second largest and third fastest growing sector: in the last 10 years it has grown by 261%.
Examples in the American market: Pfizer (PFE), Johnson & Johnson (JNJ), UnitedHealth Group (UNH), AbbVie (ABBV), Amgen (AMGN), Gilead (GILD), Eli Lilly (LLY).
Also, there is the NASDAQ Bioteh fund (TBIO), which is 98% healthcare stocks. It will definitely be in my portfolio when I get to segment diversification.