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Sector Connect – The Industrials Sector

Construction logo  In our Sector Connect series, we covered the Healthcare Industry last month.  This month, we turn our focus to the Industrials sector.  In this article, we take a bird’s eye view of the sector, while subsequent articles in this series will go further in-depth.

The Industrials Sector can generally be defined as the construction and manufacturing segments of an economy. It is the biggest sector with more than 250 industrial companies or trusts listed on the SGX.

According to the Industrial Classification Benchmark (ICB), the Industrials sector can be divided into two Super-sectors: the “Construction & Materials” and “Industrial Goods & Services”.

The Construction and Materials super-sector can be further broken down to 2 subsectors: Building Materials & Fixtures and Heavy Construction, while the “Industrial Goods & Services” Supersector can be broken down into a total of 18 subsectors. Under this diverse range of industrial types, various companies are involved in aerospace, defense, electrical components & equipment, transportation services and many more.

Performance in the Industrials sector tends to be heavily dependent on the economic climate of which the businesses’ opeSGX:N21rations are based upon. An optimistic outlook in the country will spur growth and companies will seek to expand bigger for higher profits, increasing the demand for building construction and manufactured products.

Catalysts

Emerging markets in Asia is expected to drive growth for the next decade. With strong credit growth, rising household incomes, and relatively stable politics, the region is seeing considerable investment by companies believing in the region’s growth prospects. In fact, more than 80% of the industrial stocks (>200 companies) listed on SGX have investments in the region, with significant revenue derived outside of Singapore.

Example of such companies include Noble Group (SGX: N21) which operates in over 140 locations and Sarin Technologies (SGX: U77), a diamond and gemstone machinery producer, which generated 77% of its FY2012 revenue in India and 8%in Africa.

Risks

Against the backdrop of positive outlook in emerging markets, industrial companies are facing fierce competition from around the globe. Myanmar is one classic example. With Myanmar opening up its economy and promoting foreign direct investment (FDI), many big companies are setting up offices over there to secure a slice of the pie. Just last month, Yongnam (SGX: Y02) lost a bid to South Korea’s state-run airport operator to design, construct, operate and maintain Yangon International Airport and Hanthawaddy International Airport.

Foolish Bottomline

Investing in the Industrials sector require strong understanding and knowledge of how the company fares in relative to its competitors globally. It will be wise to look out for companies with unique competitive advantages and actively expanding in countries with strong economic growth.

You can find the next two articles in our Sector Connect series here and here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.