The Changing Tide: Why Business Cycle Investing Is Key Today
In the words of legendary investor Howard Marks, "The greatest lessons regarding cycles are learned through experience." This wisdom rings truer than ever as global and domestic markets face unprecedented shifts. Inflation is climbing, interest rates remain high, and geopolitical tensions are reshaping the economic landscape. For investors, the question isn’t if the tides will turn but when. In such dynamic times, business cycle investing offers a strategy to stay ahead of the curve.
India, with its robust GDP growth potential, is a testament to resilience. Yet, challenges like inflation and fiscal adjustments demand smarter investment approaches. Business cycle investing isn’t just about riding waves but positioning oneself for the inevitable ebbs and flows. At its heart, business cycle investing aligns strategies with economic phases. Economists often describe the business cycle as having four stages: recovery, expansion, recession, and slump.
Each phase brings unique opportunities and risks. For instance, during recovery, cyclicals like banking and capital goods shine, while recessions favour defensives like pharmaceuticals and FMCG. Successful business cycle investing relies on recognising these patterns. For example, in 2017, when the currency was expensive and global growth was expected to be better than India, investing in technology yielded handsome returns. Conversely, in periods of economic expansion, sectors like infrastructure and technology take the lead.
Shifting Tides - The global economic stage is witnessing rapid changes. Inflation, once a distant worry, has become a persistent challenge. Geopolitical tensions, from trade disputes to regional conflicts, are driving volatility. As Warren Buffett puts it, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." For Indian investors, these shifts present both opportunities and risks. On the domestic front, government reforms like the Production Linked Incentive (PLI) scheme and significant capital expenditure (`100 trillion allocated to infrastructure) are fuelling long-term growth. Meanwhile, global uncertainties demand a cautious yet agile approach. Take, for instance, the ‘Blue Sky’ scenario—strong global and domestic growth. In such times, sectors like metals and banking thrive. In contrast, a ‘Dark Cloud’ phase of weak global and domestic growth calls for a defensive strategy, focussing on utilities and consumer staples.
History Lessons - Business cycles significantly influence sector performance, with varying strategies required for different economic conditions, as history has shown us. During periods of strong global and domestic growth, as seen in 2003-2004 and 2021, recovery phases favoured cyclical sectors like banking and capital goods. In contrast, weak growth scenarios like 2008-2009 called for a ‘Rider’ strategy focussing on domestic cyclicals, such as banks and automobiles, to capture recovery opportunities.
Similarly, the slowdown of 2011-2012 highlighted the importance of defensives, with sectors like technology, pharmaceuticals, and FMCG providing stability. The period of 2018-2020 showcased the need for a balanced ‘Piggybacking’ approach, blending global cyclicals with domestic defensives. By aligning portfolios with these thematic strategies, investors can navigate cycles effectively, capitalising on opportunities while mitigating risks associated with economic volatility
Key Principles -Adaptability is the cornerstone of successful business cycle investing. Markets, much like the economy, are in constant flux. Recognising the right moment to shift between sectors can make or break returns. Consider sector rotation—a strategy that reallocates investments based on the current phase of the business cycle. During recessions, defensive sectors like pharmaceuticals provide stability, while recovery phases favour cyclical industries such as automobiles and infrastructure.
Another crucial element is monitoring macroeconomic indicators. Parameters like interest rates, fiscal deficits, and credit growth offer insights into where the economy is headed. For instance, a rise in capital expenditure often signals a recovery phase, suggesting opportunities in infrastructure and banking.
Why Now? - For Indian retail investors, business cycle investing is more relevant than ever. India’s economic fundamentals—rising consumer demand, digital transformation, and robust corporate balance sheets—provide a fertile ground for growth. At the same time, intermittent volatility is inevitable. Business cycle investing helps navigate this dual reality. It allows investors to align their portfolios with macroeconomic trends, ensuring resilience across phases.
However, direct implementation of business cycle investing can be challenging for retail investors. This is where business cycle funds play a vital role, offering professional fund management backed by a proven track record in identifying and capitalising on cyclical opportunities.
■ Email : bharat@bees.in