Summary:
India’s fast-paced economic growth has accelerated the expansion of several cyclical sectors. Home to massive industrial hubs, India is fostering significant growth of the cyclical sectors. The automobile sector, capital goods sector and the BFSI sector have some of the best cyclical stocks.
India has a very rich stock market. A key part of it is the cyclical stocks. These stocks are heavily influenced by macroeconomic shifts and can be used as an effective tool to track an economy’s boom, recession and recovery phases. Cyclical stocks in India have gained significant popularity amidst the economic growth the country has witnessed in the recent past. This blog offers a comprehensive guide on cyclical stocks in India for the future generation of investors. We will also look into some of the stocks across best performing cyclical sectors.
What are cyclical stocks?
Cyclical stocks refer to the shares owned by a company whose financial performances or stock prices are directly related to the economic business cycle. These companies often belong to industries that experience highly volatile and inconsistent demand as well as profitability. In symbiosis with the economy, these industries and the companies within them go through phases of expansion and contraction. To put it in simple words, a cyclical stock performs well when the economy is strong and consumer spending is high. Conversely, these stocks struggle during economic downturns. Some of the key features of cyclical stocks include –
- Cyclical companies are extremely sensitive to economic conditions.
- Earnings and profits are subject to fluctuations throughout the economic cycle.
- Cyclical stocks are closely tied with the Gross Domestic Product (GDP).
Pros and cons of cyclical stocks
Stocks across cyclical sectors come with a range of benefits as well as risks. As an investor, novice or expert, it is essential to have a thorough understanding of both.
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| Economic upswings can fuel profits. When economy is strong and purchasing power grows, the demand for products/services across cyclical sectors like construction and manufacturing increases. As demand grows, these sectors experience more profit potential. | The obvious disadvantage of cyclical stocks is their susceptibility to economic downturns. While they can offer substantial profits during economic boom, a downwards growth trend can cause notable losses. |
| Cyclical companies tend to return value to shareholders via dividends and share buybacks when they make significant profits. This improves shareholder returns. | Companies across cyclical sectors often cut dividends and share buybacks during economic gloom, reducing income potential for investors |
| Cyclical stocks can help diversify portfolio and balance risk. Often, these stocks perform well when others like defensive stocks don’t. Defensive stocks are basically the opposite of cyclical stocks. They are unaffected by economic downturns. | Cyclical stocks tend to be more volatile than defensive stocks as they are prone to larger price swings. Certain cyclical industries like manufacturing are more vulnerable to interest rate fluctuations since they depend on massive capital investments. |
| Cyclical stocks can also provide a hedge or a shield against inflation since their earnings typically increase with inflation. | Timing the market and understanding economic cycles is tricky business. If you invest in cyclical stocks at the wrong time, it can result in losses. |
Promising landscape of cyclical sectors: Best cyclical stocks
Top cyclical sectors
Let us first look at some of the best cyclical sectors in India that offer lucrative opportunities to investors.
- Automobile and auto components – Highly cyclical industry with sales of cars, commercial vehicles and two-wheelers depending on the overall economic health.
- Infrastructure and construction – Construction, infrastructure projects and real estate development tends to benefit from hefty government spending on infrastructure during economic boom.
- Banking and financial services (BFSI) – BFSI firms perform well during economic upturns and greater credit demand.
- Consumer durables – Companies that make electronics, appliances and home furnishings witness higher demand when consumer spending increases and economy grows.
- Metals and mining – Highly cyclical and relies on commodity prices and demand for metals like copper, aluminium and steel.
- Capital goods and engineering – Manufacturers of machinery, heavy equity and capital goods benefit from rise in industrial activities during economic growth.
- Retail – Consumer spending is high during economic upturns which boosts sales across retail companies.
- Tourism and hospitality – It is closely tied to economic health as the industry heavily relies on the disposable income of people.
- Chemicals and pharmaceuticals – The industry benefits from a surge in demand for specialty products during economic growth.
- Airlines – Very cyclical in nature as the revenue airlines make depends a lot on travel demand.
Best cyclical stocks
Let’s check out the most promising cyclical stocks in India –
Top 5 cyclical stocks in the capital goods sector |
| HEG Ltd – India’s leading producer of graphite electrodes |
| Graphite India Ltd – Manufacturer of graphite electrodes, carbon and graphite specialty products in India |
| NBCC India Ltd – Expert in real estate development and engineering, procurement and construction (EPC) contracting |
| Honeywell Automation India Ltd – Large-cap operator in the engineering sector with a portfolio of integrated automation and software solutions |
| Shree Cement Ltd – One of the largest Indian cement manufacturer |
Top 5 cyclical stocks in the BFSI sector |
| Kotak Mahindra Bank Ltd – A private sector bank in India with a comprehensive product portfolio of banking products and financial services right from life insurance and personal finance to wealth management |
| Federal Bank Ltd – Scheduled commercial bank in India with a massive network of remittance partners worldwideNote: Remittance partners are entities that transfer money from their customers to respective businesses and individuals in other nations. |
| HDFC Bank Ltd – The Housing Development Finance Corporation (HDFC) is the largest private sector bank in India serving a wide customer base with personal loans, retail banking, wholesale banking, auto loans, treasury, credit cards and several other banking services |
| ICICI Bank Ltd – An Indian bank major with notable assets and market capitalization specializing in asset management, investment banking, venture capital and life and non-life insurance |
| City Union Bank Ltd – This bank offers a suite of advanced services including self-service kiosks, net banking, mobile banking and several other financial and loan products |
Top 5 cyclical stocks in the automobile sector |
| Eicher Motors Ltd – A leading automobile manufacturer in India, Eicher Motors is the parent company of Royal Enfield, a popular bike brand in the country |
| Mahindra & Mahindra Ltd – One of the largest manufacturers of tractors and utility vehicles in India |
| Bajaj Auto Ltd – A leading manufacturer of two-wheelers and three-wheelers in India producing a large number of motorcycles, scooters and auto rickshaws |
| Maruti Suzuki India Ltd – This automobile manufacturer in India is half owned by the Japanese car and motorcycle maker Suzuki Motor Corporation |
| TVS Motor Company Ltd – TVS is the among the largest motorcycle manufacturers in India, offering mopeds, commuter motorcycles, scooters and racing bikes |
Tap into India’s cyclical sectors: Unlock profit potential
It is your choice whether or not you want to invest in cyclical stocks. I mean they are clearly riskier, more volatile and more vulnerable to economic conditions. It is not for the faint hearted but it surely is for the risk takers out there. If you are willing to take more risks to gain more, cyclical stocks are the way to go. Investors pursuing long-term growth with a thorough understanding of the economic health and ability to manage volatility use cyclical stocks to balance their portfolios. You can also create a portfolio with a healthy mix of cyclical and defensive stocks, this helps spread risks.