Sector Bird’s Eye View: Industrials
What is it?
The Industrials sector comprises a diverse array of companies involved in machinery and electronic equipment, tools, industrial engineering, paper and packaging, metal and glass containers. Performance in this sector is driven largely by cyclical factors and supply and demand.
Why is it important?
Industrials are especially important as they represent the tangible growth engine for many countries. For emerging nations in particular, the majority of their GDP will often be composed of materials and manufacturing-related outputs. For the US, this combined sector contributes roughly 12% to the overall equity market.
- Atlas Copco
- Martin Marietta
- SPDR MSCI Europe Materials
- Vanguard Materials
- iShares S&P Industrials
- Vanguard Industrials Index Fund
- SPDR Select Sector Industrials
When does it do well/badly?
This sector is extremely cyclical and relies heavily on an expansionary economy for growth. In times of economic contraction, consumers hold more of their wealth in savings, rather than consuming it by buying goods. This means producers must cut back on their output, which reduces growth and development. Bull markets in this sector can be aggressive and last for quite some time when the right conditions arrive and drive substantial growth for emerging economies when times are good. Given that many industrials companies conduct cross-border business, their performance is linked closely with changes in the exchange rate that can positively or negatively impact profit margins.
Why should I invest?
The industrials sector makes a useful addition to a portfolio in times of economic expansion. Choosing emerging market industrial stocks can also provide a useful foreign investment aspect when investing in high growth regions of the globe. Given that they generally occupy the majority of an emerging nation’s GDP, they also tend to be one of the more stable choices for foreign investment.