CYCLICAL AND SEASONAL STOCKS - ARE THEY THE BEST 'DEFENSE'?

By Ruma Dubey

Cyclical and seasonal stocks. There is often confusion – aren’t they both the same? A season comes one after the other, like the movement of the cycle, so then seasonal and cyclical are the same?  And cyclical; it means what goes around comes around. Well, so do seasons; does that mean they can be used interchangeably?

In the strictest sense, no. In stock market parlance, they are essentially different. Cyclical stocks are those which move in tandem with the business cycles and reflect the state of the economy and not the changes in the season. For eg: when there the economy is booming, there is a demand for luxury goods or when there is a recession, automobiles show a slump in demand. This in short is cyclical. The products of the company share the same pattern as the economy and that is what makes them cyclical. To understand better, use the reference of the opposite – non-cyclical. These are products which have a consistent demand, irrespective of the business cycle like beverages, medicines, food, soaps, shampoos, alcohol, cigarettes and education. These are largely recession proof and hence do not move with the business cycles. Know as defensive stocks, they probably help us understand the cyclical stocks better.

So what can qualify as ‘cyclical’ stocks? Automobiles; where business cycles decide the buying or postponement of buying decision. Even high interest rate is one of the factors which influence cyclical stocks. Like realty – whose demand is affected by recession and also by a high interest regime. Airlines and hospitality are also stocks which fall under this category, where recessionary trends will dissuade people from flying or vacationing and vice versa when there are boom times. IT companies are ruled by not just domestic but also global business cycles as the sector is totally aligned with global demand and supply.

And when we talk about automobile, demand for auto ancillaries and tyre also gets affected. Low demand for realty would thus mean lower demand for cement, steel, construction materials. Thus it is not just the primary sector but all dependent on these which will also move along with the business cycles.

Financial or broking companies are affected when markets are down and moods have remained bearish for a long period of time. Banking will show pain of rising NPAs. Recession also means there is no public spending and that affects build of infrastructure which in turn affects capital goods, metals and entire construction sector.  Copper is a metal which is considered to be an indicator of the business cycles because when the economy booms, copper prices zoom; it in fact goes under the moniker of “Dr.Copper” as it has the ability to forecast economy and its price movements show shifts in the world economy.

On the other hand, seasonal stocks, as the name suggests, depends on the seasons. Like in summer, demand is high for ACs, refrigerators, invertors, fans, health care products, travel, Hotels, aviation, retailers. In monsoon, fertilizers, pesticides, seeds, all agrochemicals and basically all agricultural products demand is at its best. Monsoon season means demand for cement is at its lowest and so it is for paints and other home décor products.  Travel and hospitality also have a lean season when it is monsoon.

Apart from these seasons of nature, there are other man-made seasons. Like the ‘harvest season’, which would mean farmers would have more money in their hands and thus buying power goes up. A good monsoon thus heralds good demand on harvest for automobiles, FMCGs, consumer durabales. A poor monsoon or harvest, users in recessionary trends and that is how cyclical stocks will then come into play. Then there is also the ‘festive season’ beginning from second quarter of the fiscal, upto the end of third quarter. That time of the fiscal, there is Eid, Diwali, Christmas, Navratri; all the major Indian festivals wherein people tend to spend money. There is also a season unique to India – ‘marriage season' where people loosen their purse strings completely. That’s the time for gold - two thirds of the gold consumption in the country comes from jewellery purchases to mark weddings and other auspicious occasions.

We also have the earnings season where financial performance of companies decides the stock price. But this is indicated through the business cycle as poor demand would automatically mean poor earnings. Thus earnings season is guided by business cycles and would thus come under the umbrella of “cyclical” though it carries the tag of “seasonal!”

To conclude, seasons come and go and business cycles go up and down. But to ensure that we do not get tossed around, like in life, it is best to be a stitha-prajna – established in wisdom, where one is in control. Best to always stay put for the long term in defensive – non-cyclical and non-seasonal stocks.