The sector where resilience will be rewarded (plus 2 ASX picks for your watchlist)

For a sector often bundled into a single label, “industrials” is one of the least understood parts of the market.

Part of the problem is the definition. For many investors, industrials means transport, infrastructure and a handful of large-cap names. But that is not how IML’s Daniel Moore sees it.

“We tend to like sectors with more recurring style earnings… to help offset the cyclicality of resources in a portfolio.”

That framing matters because Moore is less focused on traditional sector definitions and more on building exposure to recurring earnings streams. 

A soft 12 months

Over the past 12 months, the S&P/ASX 300 Industrials Sector is up just 2.8% (as of 24 March). On the surface, that suggests a relatively benign, uneventful 12 months.

Even the headline number, however, is doing more to obscure than illuminate what has actually happened.

“The key contributors were banks, with the Big 4 banks contributing +8.2%,” Moore says.

“If you excluded all financials the index would have been down even further".

That single point reframes the entire sector. Strip out a narrow group of outperformers, and the underlying market has gone backwards. For many parts of the sector, the environment has been difficult.

“Elsewhere returns were hard to come by, particularly in IT (-29%) and Health Care (-29%)" adds Moore

There were exceptions. Moore points to names like Brambles (ASX: BXB), Orica (ASX: ORI) and ALS (ASX: ALQ) as strong contributors. But these were isolated pockets of strength in what has otherwise been a highly selective market.

What industrials actually means in today’s market

Moore’s definition of industrials is less about sectors and more about characteristics. That leads naturally towards businesses with recurring earnings, defensive demand profiles and, importantly, the ability to offset volatility elsewhere in the portfolio.

“We currently favour the more defensive investments in sectors like healthcare and communications… but we also like selective investments in property and infrastructure where companies have inflation-linked earnings.”

The entire premise of the approach is about constructing resilience. In a market still heavily influenced by resources, industrials, as Moore considers them, provide balance through stability of earnings and cash flow.

The three forces shaping the sector

Looking ahead, Moore sees three dominant risks that will define outcomes, outside of the rapidly evolving Middle East conflict.

“The key risks we see are persistent inflation, higher bond yields and AI disruption.”

Each operates through a different channel, but all ultimately converge on the same pressure points: margins, multiples and business models.

Inflation tests whether companies can pass through higher costs. Bond yields influence how those earnings are valued. And AI challenges the durability of those earnings altogether.

That is why Moore is explicit about what resilience looks like.

“Genuine resilience… comes from businesses that have differentiated products or services, pricing power to pass on any rise in input costs, and low risk of AI disruption or obsolescence.”

He also highlights where that resilience tends to sit.

“Companies with lower risk of AI disruption typically have more physical-based assets with high replacement cost… or are hard to ‘rip and replace’ because they have strong proprietary data, deep integration into their customers’ businesses, or operate in highly regulated industries.”

Valuation remains the final filter.

“If we are in a rising bond yield environment, valuation multiples can come under pressure.”

Which means even quality businesses are not immune if they are priced too aggressively.

Where the market is mispricing risk and opportunity

After a subdued year, valuation dispersion within industrials is becoming more pronounced. Moore is cautious on the banks, despite their contribution to returns.

“They are essentially assuming low bad debts into perpetuity.”

That assumption leaves little room for deterioration. By contrast, other parts of the market are offering more compelling entry points.

Moore notes that "insurers remain a good source of opportunity", with names like Steadfast Group (ASX: SDF), Medibank Private (ASX: MPL) and Suncorp (ASX: SUN) standing out. Healthcare is another area where valuations have adjusted.

“Good opportunities also exist in healthcare where valuations have de-rated substantially.”

The key takeaway for investors is that the market has rewarded perceived safety in some areas to the point where expectations are stretched, while other sectors have been de-rated to levels that are beginning to reflect more realistic outcomes.

Two stocks for 2026

Against that backdrop, Moore highlights two names he believes are well-positioned for the year ahead: Sigma Healthcare (ASX: SIG), which owns Chemist Warehouse, and Dalrymple Bay Infrastructure (ASX: DBI).

“Chemist Warehouse is a category killer format in the high-growth pharmacy sector,” says Moore.

“We expect they will continue to grow their sales well above the industry with their discount offer.”

That growth is supported by expansion, with Moore adding that “We also expect this growth to be enhanced by their continuous rollout of stores across Australia and internationally… they have already proven the model can be successful in New Zealand and Ireland.”

Importantly, it is also resilient.

“We think Chemist Warehouse can perform well in all parts of the economic cycle with their discount model", says Moore. 

Dalrymple Bay Infrastructure, by contrast, offers a more straightforward proposition.

“The port they own is fully contracted to 11 Met [metallurgical] coal customers… there is also excess demand and a queue of mines that want access to the port.”

The structure of those contracts underpins the investment case, with Moore noting that “DBI takes on no volume or customer risk as the contracts are take or pay with no force majeure provisions and any customer defaults are socialised amongst the other customers.”

That translates into reliable income, according to Moore. 

“This provides investors with an attractive, low-risk, 12-month forward yield ~6% growing by CPI+.”

Managed Fund

Investors Mutual All Industrials Share Fund

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