CAUGHT IN THE CROSS-FIRE OF JARGONS

about 1 month ago
No image

 

There are so many jargons and sometimes, the common man is caught right in these war or words, literally, not knowing what to do.

The biggest confusion right now is -cyclical and seasonal. Discerning analysts are currently recommending cyclical stocks and then there are some who say that it is best to buy into selective seasonal stocks. Then there are growth stocks and defensive stocks. And we thought we were buying only into stocks?

Well, these various jargons are used by brokerage houses to collectively indicate where they are currently parking their funds. Ultimately, they all remain growth stocks – fundamentally sound but with that, these various categories are like a subset.

But at the same time, there is a very thin line dividing cyclical and seasonal– seasons also go round and round like a cycle – so how are both different or are they two sides of the same coin?

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. Known 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 or low interest rate is one of the factors which influences 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.

The metal industry is also a big-time cyclical sector. It has its own set of ups and downs and currently, its on the “up.”

Our Editor, Mr.SP Tulsian in the Market Gossip column said, “This time is the best time for all commodities, be it ferrous metal (flat products like H.R.coil or long products like angles, channels, blooms, billets, bars etc.), non ferrous metal (copper, aluminium, zinc, lead), precious metal (silver), cement, paper, chemicals (bulk, speciality or API), crude, iron ore,  fertilisers (urea and complex fertilisers), rubber, sugar, graphite and other natural resources. Analysts are expecting bumper Q4 and Q1 numbers from these sectors. Collectively, over 400-500 listed stocks get covered in these sectors, but sadly (or as per market dynamics), about 90% of these stocks are small and micro cap stocks.”

And this is the also the “seasonal” buying time into summer stocks where demand is high for ACs, refrigerators, invertors, fans, health care products. 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 but since last year, its been a downer for both these sectors. Retail or FMCG is “all-season.”

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. This 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, as we have said before, we once again reiterate this golden rule - always be a stitha-prajna – established in wisdom, where one is in control. Best to always stay put for the long term in growth – non-cyclical and non-seasonal stocks.

Popular Comments