Introduction

Stocks that fluctuate depending on the economic situation are called cyclic stocks. These companies typically produce or cater to non-essential items considered a splurge and non-necessary. Suppose you want to invest in cyclical stocks. In that case, it's important to understand that they are inherently volatile during recession, but pose an opportunity to earn better returns greater returns when the economy is thriving.

What is a Cyclical Stock

A cyclical stock can be defined as a consumer discretionary stock, which means the company manufactures non-essential items such as cars, luxury items, clothes, airline companies, hotels, leisure products, and apparel, among others. These companies cater to your wants and not needs. A great example of cyclical stocks is Interglobe Aviation (Indigo Airlines) and Tata Motors.

Difference Between Cyclical and Non-Cyclical Stocks

Non-cyclical stocks, also known as defensive stocks, often outperform the market, regardless of the economic climate, even during periods of economic slowdown. These products fall under the consumer staples category, representing goods and services that you use consistently regardless of the market cycle, including during periods of recession.

Businesses that focus on necessities such as food, electricity, and water are typically noncyclical stocks. Including noncyclical stocks in your investment portfolio can be a smart move, as it can hedge against the potential losses that cyclical companies may face during economic downturns.

Features of Cyclical Stocks

• Their value is determined by the economic cycles. They peak in a booming economy and go bust in a recession.

• Their volatility index is higher than that of non-cyclical stocks

• They have the capacity to give higher returns when the economy stabilises.

• They are great for asset diversification

Examples of Cyclical Stocks by Sector

Here are some of the best cyclical stocks in the Indian market.

• Automotive: Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Bajaj Auto

• Metals and Construction: Tata Steel, Hindalco, JSW

• Consumer Goods: Whirlpool India, LG India, Havells India

• Travel and Aviation: SpiceJet, IRCTC, Interglobe Aviation (Indigo Airlines)

• Hospitality: India Hotel Companies, Trent (Westside, Zudio), Titan India

Impact of Economic Conditions on Cyclical Stocks

In a thriving economy, you can afford to buy products such as new cars, luxury items, clothes and apparel, or even embark on travel adventures. When the economy takes a downturn, your first impulse will be to trim your discretionary expenses first. This change in spending behaviour affects cyclical stocks.

During an economic downturn or recession, cyclical stocks often lose their value, and some companies may even face bankruptcy. These stocks tend to fluctuate in tandem with the ups and downs of the economic cycle. The best time to invest in these shares is during market lows and sell them when the market peaks in the business cycle.

Return Potential and Risk Profile of Investing in Cyclical Stocks

How to Include Cyclical Stocks in Your Investment Strategy

When adding the best consumer discretionary stocks to your portfolio, do your research. List down the stocks you are interested in, then analyse financial statements and other fundamentals before you invest. You can invest in cyclical stocks via:

• Buying Stock: Investing in cyclical stocks directly gives you targeted exposure to the sector.

• Mutual funds – Invest in cyclical stocks through professionally managed mutual funds for diversification.

• ETFs: ETFs give you the option to invest in a bunch of different consumer discretionary companies for sector diversification.

• Bonds: If you are risk-averse, then invest in cyclical companies that issue bonds.

Conclusion

While it's important to be mindful of the role cyclical stocks play in your portfolio, this doesn't imply that you should avoid these stocks altogether. During market booms, you can get high returns from these stocks. Noncyclical, or defensive, stocks come with lower volatility as compared to cyclical stocks, and are a good counterbalance because they don't rise and fall with the economy. Having a well-diversified portfolio could help you benefit from this approach to manage risk and build wealth in the long term.

Explore more: Key differences between Cyclical and Non-Cyclical Stocks | When to invest in Cyclical stocks?