What Are Cyclical Stocks? 5 Biggest Cyclical Stocks in India

Do you know which the most popular type of stock is when it comes to gaining high returns? Cyclical Stocks! Yes, these stocks are highly popular among investors due to their potential to offer higher returns. All right, but what exactly are cyclical stocks? What are the biggest cyclical stocks in India? Are these safe? Should you invest in it or not? You will get to know all of it once you go through this article.

Keep reading!

What are Cyclical Stocks?

Cyclical stocks are stocks of companies that are highly sensitive to the business cycle or economic conditions. The price of such stocks is highly affected by the systematic changes in the overall economy. Don’t you wonder why it is named “Cyclical Stocks”? Because it diligently follows the cycles of the economy via expansion, peak, recession, recovery, and again expansion. A crucial point to note is cyclical stocks are completely the opposite of defensive stocks.

Thus, you can say that cyclical stocks are highly volatile. This means it produces higher returns during economic expansion. Contrarily, it offers poor returns during a recession. 

(Disclaimer: The reason to mention the following brands is to explain the concept and not to disdain them).

Cyclical stocks include discretionary companies. Meaning, the products & services of discretionary companies that may be desirable for you but not essential to your daily living. You can still survive without the products of discretionary companies. Consider the products of two companies namely Hindustan Unilever and Nykaa. The former offers food & beverages while the latter provides cosmetics. You can survive without cosmetics but not without food!

Thus, cyclical stocks are typically found in industries that are closely tied to consumer spending, interest rates, and economic growth. These are influenced by macroeconomic factors such as-

• Changes in consumer spending
• Interest rates
• GDP (Gross Domestic Product)
• Inflation
• Fiscal Policy
• Employment levels
• National income
• International trade

 As the economy goes through cycles of expansion and contraction, the fortunes of these companies tend to rise and fall in sync with these changes.

Industries Associated with Cyclical Stocks

Such industries tend to benefit from increased consumer spending during periods of economic expansion when consumers have more disposable income. Conversely, during periods of economic contraction or recession, consumer spending tends to decline, leading to lower sales and profits.

Some of the major industries associated with Cyclical Stocks are-

5 Biggest Cyclical Stocks in India

We have classified the biggest five cyclical stocks in India from various sectors, based on market capitalization as of May 2023. 

Chemical Industry Sector

The chemical industry’s stocks are highly cyclical in nature because their performance tends to be closely tied to the broader economic cycle. It includes companies that produce a wide range of chemicals, such as basic chemicals, specialty chemicals, and industrial gasses. They are used in a variety of industries, including construction, automotive, consumer goods, and electronics. As a result, the demand for chemicals is closely tied to the health of the economy and the overall level of industrial activity.

During periods of economic expansion, the demand for chemicals tends to increase as businesses ramp up production. Conversely, during periods of economic contraction or recession, demand for chemicals tends to decline. Because industrial activity slows down and consumers cut back on spending. This can lead to lower sales and profits for chemical companies, which can cause their stock prices to decline.

Automobile Sector

This sector is highly sensitive to changes in the business cycle. It includes companies that produce and sell automobiles, auto parts, and related services. As a result, the demand for automobiles is closely tied to the overall health of the economy and the level of consumer spending. During periods of economic expansion, the demand for automobiles tends to increase as consumers have more disposable income and are more willing to make big purchases. This can lead to higher sales and profits for automobile companies, which can boost their stock prices.

Contrarily, the demand for automobiles tends to decline during the recession. Because consumers cut back on spending and may delay or forego big purchases such as cars. This can lead to lower sales and profits for automobile companies, which can cause their stock prices to decline. Apart from the recession, the automobile sector is also influenced by the following factors-

• Fuel prices
• Technological advances
• Government regulations

BFSI Sector (Banking, Financial Services, and Insurance)

The performance of the BFSI sector is closely tied to the macroeconomic cycle. During periods of economic expansion, the demand for financial products and services tends to increase. Because businesses and consumers have more money to invest and borrow, which can lead to higher revenue and profits for companies in the sector.

Capital Goods Sector

The capital goods sector includes companies that produce machinery, equipment, and other capital goods used in manufacturing, construction, and other industries. However, the demand for capital goods tends to decline as businesses cut back on spending and may delay or forego investments in new equipment and machinery. Eventually, it leads to lower revenue and profits for companies in the sector, which can cause their stock prices to decline.

It’s worth noting that the performance rankings of cyclical stocks can change over time based on market conditions and industry trends. 

Should You Invest in Cyclical Stocks or Not?

Now, let’s answer the final question that is hovering in your mind. Should you invest in cyclical stocks or not? Well, it depends on various factors like your investment goals, risk tolerance, and investment time horizon. By now you must have realized that Cyclical Stocks offer exclusive returns only when the economic conditions are good enough. While the reverse happens when your economy battles recession i.e., you get poor returns during low economic conditions. Therefore, you must study the global as well as domestic economy carefully. And analyze whether the investment in cyclical stocks will be worth it or not.

Also, you should pay attention to the specific industries and companies within the cyclical sector. Some may be more vulnerable to economic fluctuations than others. For example, companies in the construction industry may be more exposed to changes in government spending on infrastructure projects. But the case may not be the same with companies in the BFSI sector.

Final Words

Investing in cyclical stocks in India can provide opportunities for growth. But it requires careful consideration of economic conditions, industry trends, and individual companies’ financial health. We have provided a list of some of the biggest Cyclical Stocks in India. You may diversify your portfolios, and consider the risk tolerance & investment goals before investing in it.