One popular investment strategy is sector investing. This means investing in one or more entire industries, or sectors of human activity. In this way, you can diversify your money rather than focusing only on specific individual companies and holding just a small number of shares in your portfolio.
In this article, we introduce the individual equity sectors and, for a clearer overview, also provide typical values for stock indicators for each one. This can help you decide when it may be advantageous to buy or sell a share.
For each sector, we list the key sector-specific indicators and supplement them with the “classic” cross-sector P/E ratio, meaning price-to-earnings. When its average level is taken into account, this indicator can be used for almost all individual industries or sectors.
Banking sector
The banking sector essentially forms the foundation of global financial markets. No functioning company could operate without financing, and neither could many of us as individual investors. This sector mainly includes banks, or credit institutions. These often exist in the form of large holdings, within which you will also find their affiliated insurance companies.
The banking sector includes, for example, US stocks such as CitiGroup (C), Bank of America (BAC) and Visa (V). European shares in this sector include Deutsche Bank (DB) and BNP Paribas SA (BNP).
For banking companies, you can monitor indicators such as:
- Net Interest Income (NII), meaning the total net income that a bank earns from its business activities. This mainly involves lending to other customers or institutions.
- Total Deposits. This refers to the total deposits held with a given bank. This indicator includes money in bank accounts and money in fixed-term deposits. In general, the higher the figure, the better for the bank and therefore also for the value of the share.
- Capital to Risk Assets Ratio (CRAR). This indicator allows investors to determine the ratio between a bank’s total capital and its risk-weighted capital. In principle, it can show how riskily the bank invests and how painful any losses might be for it.
For banks, the P/E ratio usually ranges between 6 and 12.
Investments in the banking sector can provide stable dividends and returns, which may be attractive to investors looking for regular income. On the other hand, a disadvantage of the banking sector may be a certain vulnerability and potentially high sensitivity to economic cycles and changes in interest rates.
Technology sector
The technology sector is one of the youngest standard sectors. Many companies in this sector were founded in the late 1990s. Today, however, they make up a substantial part of many investors’ portfolios, including that of the famous Warren Buffett. The vast majority of technology companies come from the United States or Asia.
The technology sector includes companies such as Meta (FB), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL) and Asia’s Alibaba Group (BABA).
For technology businesses, pay particular attention to:
- Gross Profit Margin. This indicator shows how successfully a company can, or cannot, generate a good margin on its products and services.
- The number of users or customers, which is used mainly for internet services, social networks and similar businesses. The more real users use the service, the better. It is useful to compare the number of users among similar companies or services.
- Revenue growth. Especially among young and promising companies, growth can be substantial, at least in the early stages. This should be filtered out appropriately. In general, the more revenue grows, the more promising the company is.
For technology companies, the P/E ratio usually ranges between 20 and 30, although some companies may exceed this level. In such cases, the shares may be “overpriced”.
The advantage of investing in the technology sector is the potential for strong share price growth thanks to innovation, which can lead to attractive returns. The disadvantage is a higher degree of volatility and risk associated with rapid development, instability in the sector and strong competition.
Pharmaceutical sector
Companies in the pharmaceutical sector produce everything from vaccines and common medicines to dietary supplements. The market is divided among several large pharmaceutical corporations. These include GlaxoSmithKline (GSK), Novartis (NVS) and Teva Pharmaceutical (TEVA).
The key indicators in this sector are:
- Price to Sales Ratio, meaning the ratio of the share price to sales.
- The number of new medicines or patents held by pharmaceutical companies. This shows how progressive companies in the industry are.
- The number of patents owned by the company. In the United States in particular, the intellectual property of pharmaceutical companies is among their most highly valued assets.
This sector typically has a P/E ratio between 10 and 20.
As with the banking sector, investing in pharmaceutical shares can also be a stable source of income. Demand for medicines usually remains stable even during economic crises. Conversely, a possible disadvantage is companies’ concern over the high costs of research and development for new medicines if these activities are not subsidised by the state.
Industrial sector
This sector includes companies that extract raw materials such as industrial or precious metal ores, as well as resources such as oil or natural gas. The sector also includes companies that specialise in producing specific products, such as packaging, from raw materials.
Examples of such companies include the conglomerate General Electric (GE) and the manufacturer 3M (MMM).
In the industrial sector, it is useful to monitor:
- The company’s market share. This indicator tells us how important the company is within its field.
- It is also worth following the US ISM Manufacturing Index. It includes many indicators, including employment, production volume, orders and similar data. The index suggests the direction industrial shares may take. As a general rule, the higher the index value, the better the sector is performing.
The typical P/E ratio in this sector is usually between 10 and 20.
One advantage that investment in industrial shares may offer is the possibility of benefiting from global industrial expansion. If Asian economies continue to grow, they are very likely to demand raw materials and energy as well. The opposite also applies – the industrial sector is to some extent dependent on cyclical market fluctuations. If the US economy does not perform well, especially the US market in this case, growth in the industrial sector cannot be expected either.
Sector comparison
Each sector has its own characteristics. Differences appear, for example, in potential earnings per share or in declines during a crisis.
Banking sector
Banks are currently very strictly regulated. In response to the 2008 economic crisis, governments significantly restricted who banks may lend to and under what conditions. Combined with the current situation, in which most central banks, including the ECB and the US Fed, have interest rates at zero or very close to zero, banks have to look for new ways to make money.
In general, these are established brands that have already survived many financial crises. During crises, however, investors must expect a significant fall in the share price. Dividend payments may also be restricted or even cancelled during crisis years. The good news, however, is that banks are considered “too big to fail”. Even in the event of collapse, governments therefore prefer to rescue them rather than jeopardise the rest of the economy.
Technology sector
In recent years, technology companies such as Apple and Amazon have experienced seemingly endless growth. This sector grew by far the most during the economic upswing. We can speculate as to whether this is because technology shares are “cool” today or whether they are genuinely gaining value thanks to the new technologies and services they offer.
The disadvantage of this sector is that many companies do not survive the transition from the start-up phase to the stage of an established company. On the other hand, critics now consider the shares of the largest technology companies to be overpriced. Shares in this sector are, generally speaking, “in tune with the times” and usually behave exactly in line with the current economic cycle.
Pharmaceutical sector
Humanity needs medicines. Pharmaceutical companies are usually stable businesses whose shares are not subject to major fluctuations, except during crises that affect everyone. If you are interested in actively trading shares, this sector is not ideal for you. It is more suitable to find a stable dividend stock and hold it over the long term.
Problems may also arise when a company in this sector is involved in legal proceedings. In the United States in particular, patients can win enormous sums in court. For the corporation, this then becomes an unwanted major expense that affects its financial results. Conversely, if a pharmaceutical company acquires or develops a useful medicine itself, its shares can enjoy an excellent period. However, many pharmaceutical companies are currently stagnating over the long term.
Industrial sector
As already mentioned, in addition to “classic” fields such as energy and heavy industry, this sector also includes aviation. It is therefore a very diverse field. Investors should consider the circumstances of the specific share.
The industrial sector generally grows with the economy, because companies produce more and increase orders from their suppliers. Many companies in this field are very old businesses that, however, are failing to keep pace with current trends, and their share prices have been falling over the long term. One example is General Electric, a company founded in 1892 whose shares are currently almost at their low. Industrial sector shares are very sensitive to economic recessions and crises.
Diversification – risk reduction
Every investor should remember that it is not advisable to place all capital intended for investment into a single share or even into a single equity sector. Diversification always proves its value only over time. Diversification reduces the risk of losing a larger amount of money and, conversely, helps support more stable portfolio growth.