We have been hearing a lot of voices regarding the state of the economy. Some people say that worst is over and some worry about double dip recession. If we believe in the first proposition then we are somewhere at the bottom of the economic cycle and if we put our bet on the more negative thoughts then we are heading towards the bottom and will be reaching it sooner than later. In any case, for a long term stock market investor, such time of turmoil presents a pretty lucrative option of bargain hunting. If you are a seasoned investor and believe in research before taking investment decisions, you must be aware that at the bottom of a recessionary phase stocks and commodities prove to be attractive investment avenues.
If we talk about India, economic growth rate is slow and soon RBI will start easing monetary policy to stimulate growth, which will in turn boost stock market returns. As a smart investor we should not miss the bus and start preparing our portfolio to reap superior returns once economy catches speed. In this article we will focus on the sector performance in relation to economic growth so that we can figure out best sectors to invest and reward ourselves with early bird prize in form of exciting returns.
Sector Classification and Performance – Choosing the Right One
Critical part of the investment game is choosing the right sector with respect to the business cycle the economy is in. As an investor we have following sectors which we can invest in:
This sector includes building and construction companies, auto manufacturers, electrical and mechanical equipment manufacturers etc. This sector is cyclical in nature and grows in tandem with the economic growth. As per the current situation, investment in cyclical is recommended because these stocks will be the best performers once the growth pace speeds up. Best bet in this sector are Auto, Cement/Steel, and Fertilizer companies.
The companies which produce food and beverages, drugs, and FMCG belong to this sector. The whole sector is considered defensive and performance of the sector is not dependent on economic phase. When you are somewhere round the bottom of the cycle and growth is impending, this sector is not the place to be in.
All banks, NBFC’s, and insurance providers belong to this sector. This is the worst hit sector at the time of recession but once the capital is available this is the sector which witnesses strongest pull back. These are available at very attractive valuations in the time of recession or slow growth and one should take exposure into the leaders of the sector at the lowest point of economic growth.
IT services, Hotels, Tourism, Entertainment companies belong to this sector. Exposure to this sector cannot be decided just on the basis of economic phase as there are a lot of other factors which decide the fate of this sector like exchange rates, infrastructure costs, availability of human capital etc. It’s the most complex sector hence all aspects should be researched carefully before taking investment decisions.
Infrastructure and Utilities
Companies related to Highway Development, Airport construction, Railways, Ports, Power and Energy, Telecommunication belongs to this sector. Demand for products of these companies is relatively stable as they produce essential goods. If your risk appetite is not very high and you want stable returns, you can opt for this sector but you might not get impressive returns once the economic cycle turns upwards.
Mining and Oil Exploration
This is a global sector and normally companies have multinational operations. This sector normally drives the economy and is heavily dependent on commodity prices in international market. This is one of the top sectors which you should invest in at the bottom of the economy cycle.
The analysis above will help you in taking an informed investment decision at the bottom of recession but the job is yet not complete. After performing sector analysis you will have to compare firms within the sector based on fundamentals to identify the company with most upside potential. Investors ultimate goal is to earn excess returns on risk adjusted basis. So choose the gems based on your risk appetite as it’s worth the effort.