Business cycle investing: Be in the driver’s seat no matter what the road


By V Subash, Founder, Consolidated Portfolio Management Services

Different roads lead to different destinations. Yes, when the path followed is different, outcomes will be different too. For example, in the world of investing, anyone who chose not to invest in 2003-04, missed the wealth creation opportunity which emerged over the next few years. Someone who did invest in 2018 saw their investments coincide with growth seen in recovery from global financial crisis. This leads to a question, how does one identify the turning point in the market? How can an investor build a portfolio which is in sync with the evolving conditions in the economy? This is where ‘business cycle investing’ helps in a big way. Stock markets behave differently during phases which are identified as growth, recession, slump or recovery. With an investing framework based on identifying and investing as per business cycle, one will always be in the driver’s seat no matter what the road is.

When the business cycle is down, companies are nervous and spending is postponed. Factories consequently have idle capacities, businesses cut cost and capex. Layoffs become popular and salary freeze is the buzzword. Consumers also spend less. On the other hand when business cycle turns up, companies feel confident. Factories run at full capacity, businesses go for expansion, workers have multiple job offers, salaries rise and consumers buy discretionary goods and take holidays.

From an investor perspective, navigating business cycle is similar to navigating various types of roads. When the going is good, one can drive at high speed. However, in case if the path is crowded, slowing down is the only option at hand.

Business cycle investing when employed properly helps investment managers identify turning points. For example: In the current context, we are at a crucial juncture when macroeconomic factors are going to be critical. In the last decade, global Central Banks have expanded their balance sheets manifold thereby increasing liquidity. Because of this liquidity, equity markets delivered decent returns in a relatively less volatile period. With limited room for rate cuts and fiscal stimulus going forward, any change in the stance on quantum or a decline in stimulus may trigger Business Cycle phase change.

One such fund is ICICI Prudential Business Cycle Fund. The NFO offering is from Dec 29, 2020 to Jan 12, 2021



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