Understanding Economic Cycles: Expansion, Peak, Recession & Recovery

Have you ever tried a roller-coaster ride?

You feel good while going up. But as it comes down at a faster pace, you experience panic and fear.

In a similar fashion, the occurrence of ups and downs in an economy over a period of time is known as the economic/business cycle. These cycles of an economy can be categorized as expansion, peak, recession, and recovery stages.

As the economy grows, the employment level, production level, sales volume, and income grow as well. The opposite is true during an economy’s decline.

In the stock market, the set of stocks which behave in accordance with these economic/business cycles are called by name “cyclical stocks”. In this blog I will discuss everything on cyclical stocks and the top cyclical sectors.

What Are Cyclical Stocks?

Cyclical stocks are the type of equity stocks whose price is affected by macro-economic or systematic changes in the overall economy of the country.

In any economy, these kinds of stocks rise and fall with the economic/business cycle.

This seeming predictability in the movement of these stocks’ prices leads some investors to attempt to time the market. And hence they buy the shares at a low point in the business cycle and sell them at a high point to book maximum profit.

For example, Automobile stocks.

If the economy is booming, you have good savings. You would consider changing or buying a car or 2-wheeler.

So, the demand for vehicles will go up in a booming economy. Sales will increase. The profits will rise.

Hence, the stock prices will also move up.

On the other hand, during an economic slowdown, when your job security is low and you are not earning enough, buying a vehicle is a luxury.

So, the stock prices of automobile companies will fall.

And hence such stocks are called cyclical stocks.

Top Cyclical Sectors In India

The Indian economy is passing through a phase of economic slowdown, with the GDP growth registering one of the lowest rates of 5.8% in the last quarter of FY 2018-19.

While there is a consensus that the economy is slowing down, the debate is still going on whether the slowdown is structural or cyclical in nature.

So, it is prudent for an investor to consider including cyclical stocks in their portfolio.

Here are  the top 3 cyclical sectors you can look to invest in

1. Capital Goods Sector

Capital Goods refer to products that are used in the production of other products but are not incorporated into the new or final product to the consumer.

These include machine tools, industrial machinery, process plant equipment, construction & mining equipment, electrical equipment, textile machinery, printing & packaging machinery, etc.

Top 5 stocks in this sector are:

1. HEG Ltd.

HEG Ltd. is a premier company of the LNJ Bhilwara Group and is currently India’s leading graphite electrode manufacturer.

HEG Ltd. manufacturing site has one of the largest integrated graphite electrode plant in the world which processes sophisticated UHP (Ultra High Power) Electrodes.

Performance Of The Stock

Parameters BSE NSE Current Price (₹) 957.75 957.95 1 Year Profit / Loss (%)  – 77.14  – 77.18 3 Year Profit / Loss (%) 480.51 481.56 5 Year Profit / Loss (%) 207.81 207.85 Beta (1 year) 1.64 1.62 Avg. Daily Volatility (% on year basis) 3.70 3.68

Key Market Indicators

Market Cap (₹ Cr) 3,497 Book Value (₹) 1,043.66 P/E 1.16 Industry P/E 17.29 P/B 0.87 Dividend Yield (%) 8.83 Return on Equity (%) 79.76

Note: All the above values as on 23/08/2019

2. Graphite India Ltd.

Graphite India Ltd. (GIL) is the manufacturer of graphite electrodes, as well as carbon and graphite specialty products in India.

GIL’s has 6 manufacturing units spread across India and also has a 100% owned subsidiary at Nuremberg, Germany, by the name Graphite COVA GmbH.

Incorporated in the year 1967, in collaboration with erstwhile Great Lakes Carbon Corporation (GLCC) of USA, GIL has been continually improving its product quality and services.

This company is scaling to newer heights of excellence and customer recognition in recent times.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 286.45 286.00 1 Year Profit / Loss (%)  – 71.27  – 71.22 3 Year Profit / Loss (%) 282.83 282.85 5 Year Profit / Loss (%) 177.53 177.52 Beta (1 year) 1.48 1.49 Avg. Daily Volatility (% on year basis) 3.43 3.35

Key Market Indicators

Market Cap (₹ Cr) 5,383 Book Value (₹) 285.17 P/E 1.59 Industry P/E 17.29 P/B 0.97 Dividend Yield (%) 19.96 Return on Equity (%) 63.46

Note: All the above values as on 23/08/2019

3. NBCC (India) Ltd.

Incorporated in the year 1960, NBCC (India) Ltd. is a blue-chip Government of India Navratna enterprise operating in the construction sector.

The company currently present into 3 main segments, i.e.

• Project Management Consultancy (PMC)
• Real Estate Development
• Engineering, Procurement, and Construction (EPC) Contracting

Performance of the Stock

Parameters BSE NSE Current Price (₹) 30.20 30.35 1 Year Profit / Loss (%) – 58.45 – 58.41 3 Year Profit / Loss (%) – 62.98 – 62.92 5 Year Profit / Loss (%) 1.15 1.24 Beta (1 year) 1.83 1.84 Avg. Daily Volatility (% on year basis) 3.02 3.05

Key Market Indicators

Market Cap (₹ Cr) 5,274 Book Value (₹) 8.66 P/E 7.43 Industry P/E 20.71 P/B 3.38 Dividend Yield (%) 2.22 Return on Equity (%) 25.96

Note: All the above values as on 23/08/2019

4. Honeywell Automation India Ltd.

Incorporated in the year 1984, Honeywell Automation India Ltd. is a large-cap company operating in the engineering sector.

Honeywell Automation India Ltd. is in a leadership position in providing integrated automation and software solutions, including process and building solutions.

The product portfolio of this company includes environmental and combustion controls, sensing control and also provides engineering services in the field of automation and control to global clients.

With the emphasis of the current government on smart cities, this company is poised to grow manifold in the coming years.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 22,942.85 22,942.75 1 Year Profit / Loss (%) 1.60 1.85 3 Year Profit / Loss (%) 133.76 133.82 5 Year Profit / Loss (%) 334.24 334.35 Beta (1 year) 0.63 0.58 Avg. Daily Volatility (% on year basis) 1.43 1.45

Key Market Indicators

Market Cap (₹ Cr) 20,336 Book Value (₹) 2,099.56 P/E 56.66 Industry P/E 8.38 P/B 10.95 Dividend Yield (%) 0.20 Return on Equity (%) 20.53

Note: All the above values as on 23/08/2019

5. Shree Cement Ltd.

Incorporated in the year 1979, Shree Cement Ltd. is primarily an Indian cement manufacturer.

Headquartered in Kolkata, it is one of the biggest cement makers in the northern part of India and also produces and sells power under the name Shree Power and Shree Mega Power.

These Sectors Might Generate Great Returns for Investors in the Coming Years

Performance of the Stock

Parameters BSE NSE Current Price (₹) 18,742.50 18,743.78 1 Year Profit / Loss (%) 14.8 14.89 3 Year Profit / Loss (%) 51.38 51.42 5 Year Profit / Loss (%) 234.44 234.44 Beta (1 year) 1.21 1.23 Avg. Daily Volatility (% on year basis) 1.68 1.72

Key Market Indicators

Key Indicators Market Cap (₹ Cr) 64,237 Book Value (₹) 2,885.71 P/E 63.83 P/B 6.39 Dividend Yield (%) 0.33

Note: All the above values as on 23/08/2019

2. BFSI Sector

The Banking, Financial services, and Insurance (BFSI) sector is used to define companies that provide a range of such financial products or services.

Core banking, retail, private, corporate, investment, etc are various kinds of banking services available under this sector.

Top 5 stocks in this sector are:

1. Federal Bank Ltd.

Federal Bank is an Indian Private Sector, scheduled commercial bank, headquartered in Aluva, Kochi.

This bank has a customer base of around 8 million, including 1.2 million NRI customers and a large network of remittance partners across the world.

Federal Bank Ltd. has remittance arrangements with more than 110 Banks/Exchange Companies across the world and claims to handle more than 15% of India’s inward remittances.

The Bank is also listed in the London Stock Exchange and has a branch in India’s first International Financial Services Centre (IFSC) at GIFT City in Gujarat.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 80.60 80.70 1 Year Profit / Loss (%)  – 1.14  – 1.16 3 Year Profit / Loss (%) 19.73 19.83 5 Year Profit / Loss (%) 31.40 31.54 Beta (1 year) 1.42 1.43 Avg. Daily Volatility (% on year basis) 2.43 2.44

Key Market Indicators

Market Cap (₹ Cr) 15,988 Book Value (₹) 69.82 P/E 12.15 Industry P/E 19.10 P/B 1.15 Dividend Yield (%) 1.74 Cost of Funds Ratio (x) 5

Note: All the above values as on 23/08/2019

2. HDFC Bank Ltd.

HDFC Bank Ltd. (Housing Development Finance Corporation) is the largest private sector bank in India providing a plethora of banking and financial services to its customer base.

Incorporated in the year 1994, HDFC Bank Ltd. is having a market cap of Rs. 6,30,548 Crore.

As of April 2019, HDFC Bank Ltd. is India’s largest private sector lender by assets and the largest bank in India by market capitalization. Also, it was ranked 69th in 2016 BrandZ Top 100 Most Valuable Global Brands

HDFC Bank product/service portfolio includes wholesale banking, retail banking, treasury, auto loans, two wheeler loans, personal loans, loans against property, consumer durable loan, lifestyle loan, and credit cards.

Along with owns various digital products are Payzapp and SmartBUY.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 2173.50 2173.45 1 Year Profit / Loss (%) 4.19 4.17 3 Year Profit / Loss (%) 72.66 72.63 5 Year Profit / Loss (%) 156.29 156.23 Beta (1 year) 0.56 0.56 Avg. Daily Volatility (% on year basis) 0.98 1.01

Key Market Indicators

Market Cap (₹ Cr) 5,89,782 Book Value (₹) 585.93 P/E 26.44 Industry P/E 19.10 P/B 3.68 Dividend Yield (%) 0.70 Cost of Funds Ratio (x) 4.48

Note: All the above values as on 23/08/2019

3. Kotak Mahindra Bank Ltd.

Kotak Mahindra Bank Ltd. is a private sector bank in India, headquartered in Mumbai, Maharashtra.

In the year 2003, RBI issued the license to Kotak Mahindra Finance Ltd., the Kotak group’s flagship company, to carry on banking business in India.

Kotak Mahindra Bank product/service portfolio includes a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialized subsidiaries in the areas of personal finance, investment banking, general insurance, life insurance, and wealth management.

As on April 2019, Kotak Mahindra Bank is 2nd largest Indian private sector bank by market capitalization

Performance of the Stock

Parameters BSE NSE Current Price (₹) 1477.05 1477.55 1 Year Profit / Loss (%) 18.49 18.50 3 Year Profit / Loss (%) 97.67 97.69 5 Year Profit / Loss (%) 245.51 245.56 Beta (1 year) 0.82 0.83 Avg. Daily Volatility (% on year basis) 1.54 1.55

Key Market Indicators

Market Cap (₹ Cr) 2,79,390 Book Value (₹) 312.70 P/E 38.63 Industry P/E 19.10 P/B 4.58 Dividend Yield (%) 0.04 Cost of Funds Ratio (x) 4.48

Note: All the above values as on 23/08/2019

4. City Union Bank Ltd.

City Union Bank Ltd., initially called Kumbakonam Bank Ltd., preferred the role of a regional bank in the Thanjavur district of Tamil Nadu when incorporated in the year 1904.

It offers a gamut of technological services like net banking, mobile banking, self-service kiosks, and financial products. Along with these, City Union Bank offers many loan products to service the financial needs of small individual customers to large industries.

India’s first banking robot named Lakshmi was launched by City Union Bank in November 2016.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 196.80 196.05 1 Year Profit / Loss (%) 2.14 2.18 3 Year Profit / Loss (%) 80.73 80.77 5 Year Profit / Loss (%) 196.60 196.68 Beta (1 year) 0.41 0.44 Avg. Daily Volatility (% on year basis) 0.59 1.60

Key Market Indicators

Market Cap (₹ Cr) 14,139 Book Value (₹) 63.23 P/E 22.18 Industry P/E 19.10 P/B 3.12 Dividend Yield (%) 0.46 Cost of Funds Ratio (x) 5.70

Note: All the above values as on 23/08/2019

5. ICICI Bank Ltd.

Incorporated in the year 1994, ICICI (Industrial Credit and Investment Corporation of India) Bank is one of the big four banks in India.

As of January 2019, ICICI Bank is the 2nd largest bank in India, in terms of assets and market capitalization and offers a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialised subsidiaries in the areas of investment banking, life, non-life insurance, venture capital and asset management.

This bank currently has a network of 4867 branches and 14367 ATMs across Indian states and has a presence in 16 countries excluding India.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 399.00 399.10 1 Year Profit / Loss (%) 20.92 20.48 3 Year Profit / Loss (%) 76.40 70.69 5 Year Profit / Loss (%) 42.28 42.29 Beta (1 year) 1.35 1.37 Avg. Daily Volatility (% on year basis) 1.85 1.87

Key Market Indicators

Market Cap (₹ Cr) 2,58,038 Book Value (₹) 172.50 P/E 60.72 Industry P/E 19.10 P/B 2.28 Dividend Yield (%) 0.25 Cost of Funds Ratio (x) 4.20

Note: All the above values as on 23/08/2019

3. Auto Sector

The auto or automotive sector consists of a wide range of companies and organizations involved in the design, development, manufacturing, marketing, and selling of motor vehicles.

It is one of the world’s largest economic sectors by revenue.

Top 5 stocks in this sector are:

1. Mahindra & Mahindra Ltd.

Established in the year 1945, Mahindra & Mahindra Ltd. is an Indian multinational vehicle manufacturing corporation headquartered in Mumbai, Maharashtra.

It was established as Mohammad & Mahindra initially and later renamed as Mahindra and Mahindra.

It is the largest manufacturer of tractors in the world and one of the largest vehicle manufacturers by production in India.

The company began manufacturing tractors for the Indian market during the early ’60s. Currently, it is the top tractor company in the world (in terms of volume) with annual sales totaling more than 200,000 tractors.

Since its inception, the company has sold over 2.1 million tractors worldwide and has over 1,000 dealers servicing approximately 1.45 million customer base.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 512.26 512.35 1 Year Profit / Loss (%) – 45.89 – 45.82 3 Year Profit / Loss (%) – 26.43 – 26.51 5 Year Profit / Loss (%) – 23.65 – 23.71 Beta (1 year) 1.23 1.24 Avg. Daily Volatility (% on year basis) 1.70 1.72

Key Market Indicators

Market Cap (₹ Cr) 65,667 Book Value (₹) 294.60 P/E 10.20 Industry P/E 8.72 P/B 2.16 Dividend Yield (%) 1.60 Return on Equity (%) 20.42

Note: All the above values as on 23/08/2019

2. Eicher Motors Ltd.

Incorporated in 1982, Eicher Motors Limited is the leading player of the Indian automobile industry. It is the parent company of the famous Indian bike brand of Royal Enfield, a manufacturer of middleweight motorcycles.

In addition to motorcycles, Eicher has a joint venture with Sweden’s AB Volvo to form Volvo Eicher Commercial Vehicles Limited (VECV)

VECV is divided into five business units:

• Eicher Trucks and Buses
• Volvo Trucks India
• Eicher Automobile Engineering Components
• Volvo Eicher Powertrain

Performance of the Stock

Parameters BSE NSE Current Price (₹) 15,525.12 15,525.34 1 Year Profit / Loss (%) – 46.90 – 46.87 3 Year Profit / Loss (%) – 30.73 – 30.76 5 Year Profit / Loss (%) 54.11 54.32 Beta (1 year) 1.43 1.45 Avg. Daily Volatility (% on year basis) 2.11 2.17

Key Market Indicators

Key Indicators Market Cap (₹ Cr) 41,885 Book Value (₹) 3,404.59 P/E 19.01 P/B 4.51 Dividend Yield (%) 0.81

Note: All the above values as on 23/08/2019

3. Bajaj Auto Ltd.

Bajaj Auto Ltd. is an Indian global two-wheeler company and three-wheeler manufacturing company based in Pune, Maharashtra.

It manufactures motorcycles, scooters and auto rickshaws. Bajaj Auto is a part of the Bajaj Group. It was founded by Jamnalal Bajaj in Rajasthan in the 1940s

Performance of the Stock

Parameters BSE NSE Current Price (₹) 2,750.12 2,750.34 1 Year Profit / Loss (%) 2.90 2.87 3 Year Profit / Loss (%) – 4.73 – 4.76 5 Year Profit / Loss (%) 21.11 21.32 Beta (1 year) 0.87 0.89 Avg. Daily Volatility (% on year basis) 1.52 1.52

Key Market Indicators

Key Indicators Market Cap (₹ Cr) 79,590 Book Value (₹) 838.19 P/E 16.15 P/B 3.28 Dividend Yield (%) 2.18

Note: All the above values as on 23/08/2019

4. TVS Motor Company Ltd.

TVS Motor Company Ltd. is a multinational motorcycle company headquartered at Chennai, India.

It is the 3rd largest motorcycle company in India with a revenue of over Rs. 20,000 crore in FY 2018-19. The company has an annual sales of 3 million units and an annual capacity of over 4 million vehicles.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 365.12 365.34 1 Year Profit / Loss (%) – 33.90 – 33.87 3 Year Profit / Loss (%) 19.73 19..76 5 Year Profit / Loss (%) 106.11 106.32 Beta (1 year) 1.54 1.54 Avg. Daily Volatility (% on year basis) 2.18 2.17

Key Market Indicators

Key Indicators Market Cap (₹ Cr) 17,364 Book Value (₹) 69.94 P/E 24.64 P/B 5.23 Dividend Yield (%) 0.96

Note: All the above values as on 23/08/2019

5. Maruti Suzuki India Ltd.

Maruti Suzuki India Ltd., formerly known as Maruti Udyog Limited, is an automobile manufacturer in India.

It is a 56.21% owned subsidiary of the Japanese car and motorcycle manufacturer Suzuki Motor Corporation.

As of march 2019, it had a market share of around 50% of the Indian passenger car market.

Performance of the Stock

Parameters BSE NSE Current Price (₹) 6250.12 6250.34 1 Year Profit / Loss (%) – 31.90 – 31.87 3 Year Profit / Loss (%) 26.73 26.76 5 Year Profit / Loss (%) 126.11 126.32 Beta (1 year) 1.35 1.38 Avg. Daily Volatility (% on year basis) 1.85 1.85

Key Market Indicators

Key Indicators Market Cap (₹ Cr) 1,88,956 Book Value (₹) 1,604.06 P/E 25.70 P/B 3.90 Dividend Yield (%) 1.28

Note: All the above values as on 23/08/2019

Should you invest in Cyclical stocks?

Cyclical stocks are viewed as more volatile than non-cyclical or defensive stocks,which tend to be more stable during periods of economic declines or slowdown.

However, they offer greater potential for growth because they tend to outperform the market during periods of economic boost.

Investors seeking long-term growth with managed volatility tend to balance their portfolios with a mix of cyclical stocks and defensive stocks.

The Bottom Line

Investing in cyclical sectors is risky due to the significant ups and downs. Although they carry the risk of loss, you can earn hefty profits when their prices go up. The trick lies in timing the market smartly as per economic cycle of the country.

But keep in mind that cyclical and defensive sectors are opposite.

Hence, they are good for diversification. Add stocks of both these sectors to your kitty. Remember to strike the right balance between risk and returns as per investment goal of an individual.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww