Your guide to ASX market sectors

If you're new to investing in ASX shares, navigating the landscape of an unfamiliar stock market may seem a little daunting. So, we'd like to share a few pointers on the lay of the land to help you find your way around.

In this article, we'll introduce the 11 market sectors that make up the ASX. And we'll explain how a good understanding of the way sectors respond to macroeconomic events is key to building a well-diversified share portfolio.

But first, welcome to the Australian Securities Exchange (ASX). Based in Sydney, the ASX operates Australia's primary share market. It performs various financial services for corporations and both wholesale and retail investors. 

Functions of the ASX include overseeing company listings and initial public offerings (IPOs), coordinating with industry regulators, and clearing house activities such as settling trades and facilitating payments. 

What are ASX share market sectors?

There are more than 2,770 public companies listed on the ASX, each divided into 11 market sectors based on their business operations or revenue sources. 

The sectors are categorised using the Global Industry Classification Standard (GICS). They include 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 rating agency Standard & Poor's (now known as S&P Global Ratings or S&P).

Why are stock market sectors important?

The GICS is more than just a boring old method of financial classification. It is a helpful lens through which we can analyse the economy and assess its overall health. It is also valuable when considering how to diversify your portfolio.

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

However, companies grouped into other ASX market sectors with different operations might respond to those same events in different (and perhaps even opposing) ways.

This is important. It means that if you combine shares from various industry groups into one share portfolio, you can mitigate (or hedge against) certain economic risk factors.

For example, when interest rates are higher and the economy is cooling, companies in the consumer discretionary sector may see their profits (and share prices) decline. Consumer discretionary includes luxury brands and travel and tourism – the first things consumers cut back on when money is tight. 

However, companies in the consumer staples sector may see their profits increase in the same scenario. Consumer staples include household necessities like groceries. Consumers may spend more of their paycheques on these products when times are tough so that their money goes further.

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

And that's the whole point of diversifying!

With that in mind, let's 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 based on their market capitalisation (as of December 2023).

1. Energy

The energy sector powers the economy – literally. 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 delivers the raw materials the rest of the economy uses to produce goods and services.

Materials is one of the largest ASX market sectors. It includes the mining and exploration companies that extract 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.

The materials sector also includes chemical companies that produce fertilisers and industrial gases and companies that make construction materials like bricks and steel.

It even encompasses timber companies, paper mills, and companies that make 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 includes transportation and logistics companies (including commercial airlines), machinery and construction companies, and commercial and professional service companies (like waste management and human resources).

This sector performs 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, 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 comprises 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, such as junior biotech companies, are highly speculative, other more established ones are considered defensive blue chips.

7. Financials

The big four Australian banks dominate the ASX financials sector, including 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 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.

Investors typically see the tech sector 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 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 media, entertainment, marketing, and advertising companies, 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 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. They pay these 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 interest rates 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.

Which sectors are performing best in the ASX share market?

Surprisingly, despite persistently high inflation and rising interest rates, it's been the S&P/ASX200 Information Technology Index (ASX: XIJ) and the S&P/ASX200 Consumer Discretionary Index (ASX: XDJ) that have outperformed so far in 2023 (up about 20% and 10% year-to-date, respectively).

However, it's worth noting that both those indices are on the rebound after suffering terrible declines in 2022 — and, despite the gains made this year, neither index has fully recovered to 2021 levels. It shows just how volatile financial markets have been over the past few years.

Which are the worst performers?

In many ways, 2023 has just been the reverse of 2022. After suffering massive declines last year, tech and consumer discretionary have been on the rebound. And, after outperforming last year, the S&P/ASX200 Energy Index (ASX: XEJ) and the S&P/ASX200 Consumer Staples Index (ASX: XSJ) have been the worst performers this year (both down about 6% year-to-date). 

The outbreak of the Russia-Ukraine conflict rattled energy markets last year, sending the price of energy skyrocketing. And global recession fears pushed up the prices of defensive shares like consumer staples.

And while those themes have both remained very much present throughout 2023, investors appear to have grown more comfortable accepting those risks.

Which sectors do well in a bear market?

In the finance world, a bear market 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.

Defensive shares, like those in the consumer staples, utilities, and healthcare sectors, tend to hold up the best during these periods. This is because these goods and services are considered 'necessities' and are the last items households will cut back their spending on when money is tight.

Which sectors do well in a bull market?

The opposite of a bear market is a bull market, 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, some parts of the healthcare (like more speculative biotech stocks), and property sectors. These companies are often highly leveraged and are more likely to outperform when interest rates are low and investors are excited about the future.