Do Not Call
Not all sectors of the stock market perform the same way at all times. Some tend to grow steadily regardless of economic conditions, while others rise and fall with economic cycles. These are called cyclical sectors. Understanding their behavior across economic phases can help investors make more informed decisions. In this article, we explore what cyclical sectors are, how they behave across economic phases, and which industries and stocks typically fall into this category.
Cyclical sectors include industries whose performance is closely tied to the broader economic cycle—they tend to do well when the economy is growing and struggle during downturns.
Highly sensitive to consumer demand and business investment
Volatile earnings depending on economic health
Tend to outperform in expansion phases and underperform in recessions
Different sectors tend to perform differently across economic cycle phases, as outlined below:
Economic Phase |
Sector Performance |
|---|---|
Expansion |
Cyclical sectors outperform |
Peak |
Momentum slows down |
Recession |
Underperform due to falling demand |
Recovery |
Begin to rebound with rising activity |
Cyclical and defensive sectors respond differently to economic changes. Key differences include:
Feature |
Cyclical Sectors |
Defensive Sectors |
|---|---|---|
Economic Sensitivity |
High |
Low |
Examples |
Auto, Real Estate, Metals |
FMCG, Healthcare, Utilities |
Stock Volatility |
High |
Low |
Typical Performance Phase |
Tend to perform better during early recovery phases (timing and outcomes may vary) |
Tend to remain stable across most economic conditions |
The following sectors in India tend to perform strongly during economic growth phases, supported by rising demand and investment:
Demand rises in growth phases when consumers and businesses have higher purchasing power.
Maruti Suzuki
Tata Motors
Bajaj Auto
Eicher Motors
Driven by credit availability and economic expansion. Lower interest rates also spur demand.
DLF
Godrej Properties
Oberoi Realty
L&T
Prices are highly influenced by global demand cycles, especially in infrastructure and manufacturing.
Tata Steel
Hindalco
JSW Steel
NMDC
As borrowing and spending increase, so does the performance of banks and NBFCs. However, they are vulnerable in slowdowns due to credit risk.
ICICI Bank
SBI
Axis Bank
Bajaj Finance
Investments in capital infrastructure increase during economic booms.
Siemens
ABB India
Bharat Heavy Electricals Limited (BHEL)
Thermax
Discretionary spending increases in growth periods, boosting tourism and leisure activity.
Indian Hotels Company
IRCTC
EaseMyTrip
Look for signs like:
Sales and profits rising only in expansion periods
Sharp declines during slowdowns or global crises
Strong dependence on credit cycles or raw material prices
Investors often consider macro trends, diversification, and relative valuations while exploring cyclical sectors. Key strategies include:
Invest early in the recovery phase and consider reducing exposure near the peak.
Even within cyclical sectors, diversify across industries to reduce concentrated risk.
Track interest rates, inflation, GDP growth, and industrial output to anticipate turns in the cycle.
Compare Price-to-Earnings (P/E) or Price-to-Book (P/B) ratios against long-term sector averages to identify potential value buys.
Investing in cyclical stocks carries specific risks that can affect returns. Key risks include:
Risk |
Impact |
|---|---|
Market Timing Risk |
Poor timing can result in buying high or selling low |
Earnings Volatility |
Revenue may fall sharply in downturns |
External Dependency |
Sensitive to global prices, demand shifts, and commodity trends |
Regulatory Shifts |
Government policy can impact sector outlook quickly |
Some sectors like telecom or energy can appear cyclical due to short-term price movements, but their demand often remains stable and is thus better classified as quasi-defensive.
Cyclical sectors can offer substantial growth potential for investors who understand how to navigate market cycles. By understanding market cycles and maintaining a diversified approach, investors may better navigate the opportunities and risks associated with cyclical sectors. While the risks are higher than with defensive sectors, the potential for returns during economic booms makes cyclicals a valuable component of a balanced portfolio.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
They can be, but timing matters. These stocks perform best during economic recoveries and expansions.
Check if the sector’s performance swings significantly with GDP growth, consumer demand, or global commodity cycles.
Some do, but the payouts are often inconsistent compared to defensive sectors.
Beginners can invest with caution, preferably through mutual funds or ETFs focusing on cyclical sectors to reduce direct risk.
.jpeg)
27689
Navigate the tax maze with ease! Uncover Income Tax 101, demystify jargon with Terms for Beginners, and choose between Old or New Regimes.
49315
Unlock the world of credit! From picking the perfect card to savvy loan management, navigate wisely.
28930
Money Management and Financial Planning covers personal finance basics, setting goals, budgeting...
13402
Explore the investment cosmos! From beginner's guides to sharp-witted strategies, explore India's treasure trove of options.
2959
Discover essential insights on various types of insurance in India.
4289
Welcome to Tech in Finance, where we explore the exciting intersection of technology and finance...
.webp "Download"){kind=icon}
.jpeg "image not found")
