Stock Market Sectors
Global Asset Management’s first rule of portfolio management is ensuring clients are adequately diversified. One of the ways to diversify is owning stocks in different sectors of the market. Individual sectors rise and fall at different times in the economic cycle. Investing in multiple sectors smooths out the value and performance over time. This is one of the first things GAM advisors in the Seoul, South Korea office explain to new clients.
People new to the market, or with limited funds to invest, sometimes turn to managed money products. Some of these are good and some of these are asset management scams. Index funds that mimic the composition of the market, with low management, fees are good. Open-ended mutual funds are not an efficient manner of broad-based investment. Most underperform the major market indexes and charge fees, many hidden, up to 7%. At times this borders on fraud, and takes a big bite out of investment returns.
Because of increased competition and online trading, brokerage fees have decreased substantially. It is now economically efficient for many to invest directly within their own portfolio of stocks. The first place to start is to diversify by sectors. The Global Industry Classification Standard divides publicly trading companies into 11 market sectors. The following is a list of the stock market sectors, their defining features, and examples of well-known companies.
Basic Materials includes metals, chemical, packaging, paper, construction materials and paper companies. These companies take core or raw materials and make them into key supplies that are used to make other products. They operate business-to-business at the beginning of the supply chain. For example, they provide wood for homes, steel for automobiles, and plastics for manufacturing goods and packaging.
Examples: Dow Inc. (NYSE: DOW), Rio Tinto Group (NYSE: RIO), The Scotts Miracle-Gro Company (NYSE: SMG)
The Energy sector includes oil, gas, coal and other fuel companies; also, energy equipment and service companies that build equipment and provide services for energy producers. Many of these companies pay generous dividends and are relatively stable, making them good defensive plays in rough markets. Stock prices in this sector are closely correlated with oil prices; they generate steady profits and are solid long-term holds.
Examples: Royal Dutch Shell plc (NYSE: RDS.A), Exxon Mobile Corporation (NYSE: XOM), Halliburton Company (NYSE: HAL)
The Industrials sector contains many large-cap heavyweights, like aerospace, defense, construction and manufacturing. Similar to big oil, companies in this sector have healthy cash flows and dividends. It’s a good place to look for long-term and defensive positions. Aerospace & Defense companies do especially well when national defense budgets are rising, as they are now.
Examples: Lockheed Martin Corporation (NYSE: LMT), Caterpillar Inc. (NYSE: CAT), United Parcel Service Inc. (NYSE: UPS), Honeywell International Inc. (NYSE: HON)
Consumer Discretionary stocks include companies where individuals spend money. Companies sell products and services directly to the consumer that are not considered day-to-day necessities. This includes cars, restaurants, hotels, apparel, luxury goods, furniture and leisure-related businesses. It’s sometimes referred to as the Consumer Cyclical sector since it rises and falls with business cycles. When times are good and consumer confidence is high, stocks in this sector do well. These stocks are reactive to quarterly earnings results.
Examples: Amazon.com, Inc. (NASDAQ: AMZN), The Home Depot, Inc. (NYSE: HD), General Motors Company (NYSE: GM), McDonald’s Corporation (NYSE: MCD), Starbucks Corporation (NASDAQ: SBUX)
Consumer Staples companies sell directly to consumers. The difference from the Consumer Discretionary sector is companies sell goods and services that people need to buy, buy regularly, or buy when they have lower income and are looking for discounted prices. People need to buy food at the grocery store, but they don’t need to eat in restaurants, to illustrate the difference. Consumer Staples stocks tend to be more resilient during economic downturns. The stocks in this sector include food, beverage and tobacco companies, along with discount retailers.
Examples: The Coca-Cola Company (NYSE: KO), Walmart Inc. (NYSE: WMT), The Procter & Gamble Company (NYSE: PG), Target Corporation (NYSE: TGT)
The Healthcare Sector includes companies that facilitate the provision of healthcare. This includes pharmaceuticals, health insurance, medical equipment manufacturers and healthcare services. Healthcare stocks can be good choices for conservative growth. The general population is aging driving up demand for these goods and services, and regardless, people always need healthcare. Wellness and preventative products are a growing area within the sector.
Examples: Pfizer Inc. (NYSE: PFE), Novartis AG (NYSE: NVS), UnitedHealth Group Inc. (NYSE: UNH), Boston Scientific Corporation (NYSE: BSX)
The Financial Sector includes companies that provide various financial services. Industries within the sector include banks, insurance companies, investment companies and fintech companies. The sector is closely tied to interest rates, since a large part of its revenue comes from loans and mortgages. Unlike other sectors that react to the state of the overall economy, the economy depends on a strong financial sector. The sector is a leading indicator.
Examples: JPMorgan Chase & Co. (NYSE: JPM), PayPal Holdings, Inc. (NASDAQ: PYPL), Bank of America Corporation (NSYE: BAC), Visa Inc. (NYSE: V), The Travelers Companies, Inc. (NYSE: TRV)
The Information Technology Sector, known as the “tech sector”, is one of the leading sectors. It contains many global companies with strong growth, but they are expensive and volatile compared to other, more conservative parts of the market. The sector includes cybersecurity, software and cloud companies, as well as electronic and communications equipment, data processing and IT services. The sector contains many leading foreign listings, including companies from Japan and South Korea.
Examples: Samsung Electronics Co., Ltd (KSE: 005930), Microsoft Corporation (NASDAQ: MSFT), Check Point Software Technologies Ltd. (NASDAQ: CHKP), QUALCOMM Incorporated (NASDAQ: QCOM)
The Communications Sector includes telephone, wireless and internet operators, cable companies, satellite companies, social media companies, and streaming companies. Many of these make their money based on recurring revenue and/or advertising revenue.
Examples: AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ), Netflix, Inc. (NASDAQ: NFLX), Facebook, Inc. (NASDAQ: FB), Comcast Corporation (NASDAQ: CMCSA)
Companies in the Utilities sector provide electricity, gas and water. They are considered defensive stocks because people and businesses always need what they are selling. Many operate with little competition and a lot of government regulation. They are conservative companies that generally offer steady dividends as a trade-off for strong growth.
Examples: Sempra Energy (NYSE: SRE), American Water Works Company, Inc. (NYSE: AWK), Consolidated Edison, Inc. (NYSE: ED)
The Real Estate Sector is comprised mainly of real estate developers, REITs (Real Estate Investment Trusts) and storage companies. They build and operate malls, offices, industrial spaces, apartment, farm properties and nursing homes. REITs earn revenue from rental income and grow from increasing property values. They are required by law to pay out 90% of taxable profits as quarterly dividends and are popular with fixed income investors.
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Examples: Public Storage (NYSE: PSA), CBRE Group, Inc. (NYSE: CBRE), Boston Properties, Inc. (NYSE: BXP)
For more information, please speak with a GAM investment advisor. Contact the Global Asset Management Seoul office at https://www.global-asset-mgmt.com/contact-us/