As we approach the final few trading sessions of the year, this is a good opportunity to look at which sectors performed best and worst for 2023 and the reasoning behind this performance.
Australian equity sectors saw significant shifts in sector performance between 2022 and 2023, mirroring global economic changes, including changing inflation and interest rate expectations. In this article, we’ll look at the top and bottom performing sectors for 2023, many of which reversed their returns from 2022.
| Sector | 2023 Return | 2022 Return |
| Technology | 30.64% | -33.62% |
| Consumer Discretionary | 23.02% | -19.44% |
| Materials | 18.12% | 16.42% |
| Communications | 17.44% | -9.80% |
| Real Estate | 14.98% | -20.41% |
| Industrials | 13.50% | -2.66% |
| Financials | 12.77% | 3.30% |
| Energy | 7.74% | 52.75% |
| Healthcare | 3.64% | -6.98% |
| Utilities | 3.12% | 30.78% |
| Consumer Staples | 2.07% | -33.56% |
Technology
The Technology sector led with a remarkable 30.64% return in 2023, a stark reversal from its 33.62% decline in 2022. Factors contributing to this resurgence include easing inflation, prospects of lower interest rates favouring growth sectors, and rising demand for hardware and software driven by advances in Artificial Intelligence.
Consumer Discretionary and Materials
The Consumer Discretionary sector followed suit, achieving a 23.02% return in 2023, recovering from a 19.44% drop in 2022. This upturn reflects global economic resilience and anticipation of interest rate cuts in 2024, easing household financial pressures. Material stocks also rose by 18.12%, buoyed by global economic resilience and stimulus expectations in China.
Real Estate & Financials
The Real Estate sector rebounded with a 14.98% gain in 2023, recuperating from a 20.41% fall in 2022. This recovery is underpinned by the subsiding impact of rising interest rates and a shift in investor sentiment, expecting a temporary economic slowdown followed by a resurgence in late 2024.
Financials posted a reasonable 12.7% return, as concerns of bad loans from the resident housing market eased given the property market has proved surprisingly resilient. This has been enough to offset concerns of tightening lending margins, which were evident in the most recent earnings reports by major banks.
Assessing the Underperformers
Despite the generally positive trend, some sectors lagged. The Energy sector, despite a 7.74% increase in 2023, underperformed due to a fall in oil prices from US$120 to US$75 currently, with other key commodities such as natural gas and coal also experiencing similar declines. Adding to this were actions by the US to limit prices by releasing their strategic stockpiles. At the same time, internal disputes within OPEC+ have seen investors question the cartels’ ability to support prices effectively.
Consumer Staples was also a notable underperformer, rising just 2.07% in 2023 given easing inflation pressures and the defensive nature of the sector. As a deep recession that was once thought to be inevitable has receded, sentiment for this haven sector has fallen. The utility sector, which is also traditionally seen as a defensive play, might not have captured investor interest in a year where riskier growth sectors were back in favour. The sector rose just 3.12% and typically offers stable dividends but limited growth potential, making them more attractive in a rising interest rate and inflationary environment and vice versa.
The performance of ASX200 sectors in 2023 highlights a shift in the economy adapting to the effects of the pandemic, as well as post-2022 which was characterised by rising interest rates and inflation. Sectors like Technology, Consumer Discretionary, and Materials capitalized on these shifts, reflecting the dynamic nature of equity markets and the impact of macroeconomic factors. As central banks aim to achieve a soft landing, the continuation or reversal of these sectoral trends remains a key focus for investors as we look forward to 2024.
