Understanding business cycle investing

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Every individual goes through various phases in one’s life. The endeavour always remains to pass through these phases successfully. However, it requires some strategy to align with our vision, pick life’s opportunities, and ensure timely execution. Similarly, when it comes to any businesses, they too have their own sets of cycles which consists of phases like slump, recovery, expansion and growth. If one knows the how-to to rides these phases of a business, it would be an effective add-on to one’s overall wealth creation journey.

What is business cycle investing?

Business cycles largely depend on macro-economic factors and consumers’ behaviour, be it domestic or international. At the same time, every business does not respond to a changing economic situation in a similar manner. And therein lies the wealth creation opportunities. Thus, business cycle investing, as the name suggests, is a strategy which helps capture these opportunities by picking the upcoming probable trends while keeping investors ahead of the curve.

Factors which help identify a business cycle

There are various factors which aid in figuring out the business cycle. For instance, growth phases show signs of confidence among consumers as well as businesses, factories tend to operate at full capacities, companies plan expansions, employees get multiple job offers amid salary hikes and consumers’ discretionary spending goes up. On the other hand, in the slump phase, the exactly opposite indicators come to the fore. Be it consumers’ spending cuts, layoffs, salary freezes, nervous consumers and businesses postponing expansion while factories run at lower capacities, among others. Such signs are the harbingers of the upcoming business cycles, which an astute fund manager looking for the early signs of a change in business cycle will pick on.

Strategy in business cycle investing

Since the investment approach in the business cycle based strategy depends on the macro-economic factors, the approach followed is purely top down. The fund manager and the research team, typically, determine themes which stand to gain in that particular phase of the cycle and accordingly builds the portfolio. Furthermore, such a portfolio is market cap and sector agnostic in nature. Given the approach followed, business cycle based investing tends to be dynamic in nature with the sole objective being to capitalise on the shifts taking place in the economy and consequently the companies which operate in the economy.

Why business cycle investing now?

Presently, the global macroeconomic factors are highly dynamic. Major global economies continue to battle inflation which is higher than their tolerance levels. It must be noted that higher inflation affects interest rates, liquidity and subsequently the business cycle. Central banks are seen striving to control inflation at the cost of growth. Given the hawkish stance, liquidity is already squeezed as fiscal and monetary policies are being tightened. This may potentially contribute to a change in business cycle.

Amid this, the Indian economy is better placed on various macroeconomic parameters. Various fast-tracked reforms and their swift implementation by the government bodes well for the domestic economy. Though there could be intermittent volatility owing to geo-political uncertainties, the domestic economy is likely to remain resilient and growth-oriented.

Business cycle based mutual funds

For a lay investor keeping track of the economy, macroeconomic developments, understanding its impact on various sectors etc. is a tough task. Even if one were to spot a potential opportunity, investing in the same in a timely matter is of paramount importance in order yield the desired outcome. This is another challenge for an investor.

To address these obstacles, mutual fund houses have offering based on business cycle investing. The fund just like any other mutual fund category, is professionally managed, and aids in capitalising the opportunities emerging out of the dynamic macroeconomic situation. Those opting for such type of offering should have an investment horizon of atleast five years and more such that there is sufficient for the calls taken by the fund manager to play out.

Note: This article has been authored by Dr Ramesh Maloo, Ph.D, CFPcm, Director at Maloo Investwise Pvt Ltd.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow