Variety may be the spice of life, but it’s also an investment fundamental. Investing across different industries allows you to gain exposure to different sectors of the economy. Different industries respond differently to changes in economic fundamentals. Here we take a look at 7 ASX industries to include in your portfolio.
Diversifying across industries
Diversification is a method of reducing the risk of a portfolio by allocating investments amongst financial instruments, industries, and geographies. Because various securities will react differently to the same event, this technique has the effect of reducing the volatility of returns on the portfolio as a whole. Different industries have different attributes and tend to behave in unique ways throughout the economic cycle.
Each industry has its own benefits and risks. Some industries, such as resources, tend to be very cyclical and do well when the economy is performing strongly but poorly when the economy is declining. Other industries, such as healthcare, are less exposed to the economic cycle. By investing across a range of industries you can avoid putting all your eggs in one basket, so to speak.
Here are 7 industries that you may want to consider including in your portfolio.
The healthcare industry includes pharmaceutical and biotechnology companies, health care service providers and facility operators, and manufacturers of healthcare equipment. The S&P/ASX 200 Health Care Index increased 41% over 2019. Demand for healthcare products and services tends to be less sensitive to fluctuations in the economic cycle. The sector can tend to perform better in the later stages of the business cycle.
CSL Limited (ASX: CSL) is the largest healthcare share on the ASX by market capitalisation. CSL is a biotechnology company that manufactures plasma therapies and vaccines. Other large ASX healthcare shares include Ramsay Health Care Limited (ASX: RHC), a hospital operator, Sonic Healthcare Limited (ASX: SHL), a medical diagnostics company providing laboratory and imaging services, and Cochlear Limited (ASX: COH), which provides hearing implant solutions.
The resources industry includes companies involved in mining and producers of metals and minerals as well as companies involved in the oil and gas industry and the production and distribution of consumable fuels. The S&P/ASX 200 Resources Index increased 23.6% over 2019. The resources sector can be more strongly influenced by the economic cycle, as demand for inputs increases when economic activity is high.
BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are well known large cap mining shares operating in the resources sector. Both were boosted by strong iron ore prices in 2019 which allowed them to pay record dividends. Woodside Petroleum Limited (ASX: WPL) is an oil and gas operator in the resources sector.
The industrials industry includes companies involved in the supply of capital goods such as machinery, engineering, aerospace and building products. It also includes companies providing commercial services and supplies such as employment, environmental, office, and transport services. The S&P/ASX 200 Industrials Index increased 24.2% over 2019. The industrials sector provides some exposure to infrastructure spending but can be sensitive to economic cycles. The sector tends to perform better in the early to middle stages of the business cycle.
Transurban Group (ASX: TCL) is the largest company operating in the industrial sector on the ASX by market capitalisation. Transurban is one of the world’s largest toll road operators. Other notable industrials companies include Sydney Airport Holdings Pty Ltd (ASX: SYD), Brambles Limited (ASX: BXB), a logistics business with the world’s largest pool of reusable pallets and containers, and Qantas Airways Limited (ASX: QAN).
Companies in the consumer discretionary sector include manufacturers of automobiles, household durables, apparel and leisure equipment. It also includes hotels, restaurants and leisure facilities, media services and consumer retailing. The S&P/ASX 200 Consumer Discretionary Index increased 29.9% over 2019. The consumer discretionary sector can be strongly influenced by the economic cycle and tends to do well in times of high economic activity.
Wesfarmers Ltd (ASX: WES) is the largest consumer discretionary share on the ASX by market capitalisation. Other notable listed consumer discretionary shares include Aristocrat Leisure Limited (ASX: ALL), Tabcorp Holdings Limited (ASX: TAH) and Crown Resorts Ltd (ASX: CWN).
The consumer staples sector comprises companies involved in the manufacture of food, beverages, and tobacco, and non-durable household goods and personal products. It also includes food and drug retailers. The S&P/ASX 200 Consumer Staples Index increased 18.8% over 2019. The consumer staples sector is less sensitive to the economic cycle as people tend to need products provided by this sector regardless of the economic climate.
Woolworths Group Ltd (ASX: WOW) is the largest company operating in the consumer staple sector by market capitalisation, followed by its closest competitor Coles Group Ltd (ASX: COL). Treasury Wine Estates (ASX: TWE) and A2 Milk Company Ltd (ASX: A2M) also operate in this industry.
The financial industry is composed of companies involved in banking, investment banking, mortgage and consumer finance, and corporate lending. It also includes businesses providing asset management and custody services, insurance, and financial investment products. The S&P/ASX 200 Financials Index increased 9.6% over 2019. Financial shares can be sensitive to regulatory and monetary policy settings and changes in the economy.
The big four banks all operate in the financial industry, as do insurers QBE Insurance Group Ltd (ASX: QBE), Insurance Australia Group Ltd (ASX: IAG), and Medibank Private Ltd (ASX: MPL). Other significant financial sector stocks include Magellan Financial Group Ltd (ASX: MFG), Macquarie Group Ltd (ASX: MQG), and Netwealth Group Ltd (ASX: NWL).
The technology industry broadly encompasses companies involved in developing software and providing technology consulting and services, as well as manufacturers and distributors of hardware, electronic equipment and semiconductor equipment. The S&P/ASX 200 Information Technology Index increased 33% over 2019. The information technology sector can be volatile, but offers exposure to growth associated with the rise of artificial intelligence, mobile computing, big data and quantum computing.
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Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, Cochlear Ltd., and CSL Ltd. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited, Macquarie Group Limited, Sydney Airport Holdings Limited, Transurban Group, and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk, Altium, Appen Ltd, Insurance Australia Group Limited, Netwealth, Wesfarmers Limited, WiseTech Global, and Xero. The Motley Fool Australia has recommended Cochlear Ltd., Ramsay Health Care Limited, and Sonic Healthcare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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