The business cycle has a lot
to do with the third principle of the Dow Theory created by Charles H. Dow:
Primary trend has three phases-
· Accumulation Phase
· Participation Phase
· Distribution Phase
Here let us assume the primary trend is an uptrend. During the accumulation phase this is the starting point of the uptrend in a business cycle, the participation phase is when the business cycle has started to actually boom, with strong fundamentals good revenues, profits etc. The distribution phase is when all these good news have been discounted in the share price and in the market, and people don’t really see any good news coming, this is when the smart investors who bought in the accumulation phase start selling and book profits. At the distribution phase, the experienced sell the shares to the inexperienced.
Let us take an example:
• Accumulation phase from April 2003 to June 2003 during which nobody believed that markets could rally but intelligent investor took buy side positions in the stock market.
• Participation phase from July 2003 to January 2004 during which largest and longest price movement occurred.
• Distribution phase from February 2004 to May 2004 during which smart money closed buy side positions in the market.
To not get affected by the business cycle, one must learn the art of asset allocation, again it depends on your personal financial goals, but it is something that investors need to focus on.
Asset allocation is the process of balancing your portfolio by investing the right amount of capital in the various asset classes available, such as equity, debt, real estate, commodity to name a few.
Usually, it is advised to equally distribute your capital among the asset classes that you are investing in, so that you are carrying a risk to reward ratio of 1:1. As over allocating of funds in one asset class, is a big risk that one is carrying.
Corporate earnings, interest rates, inflation, and other factors that change as economies expand and contract can affect the performance of investments. Understanding how various types of stocks, bonds, and other assets have historically performed at various points in the business cycle may help investors identify opportunities as well as risks.
Talking about business cycles, there are two major business types that are very cyclical in nature, first being metals and the second one is real estate.
If you look at the BSE Metals Index chart, it is very easy to understand how cyclical the metals sector is. The highs touched in 2008 have been broken out 13 years later now in 2021.
The demand for metals has been very robust, international steel prices have been soaring. This being one of the main reasons why steel manufacturing companies in India have been in a momentum of continuous growth of their top and bottom line. Along with this, economies around the world are moving away from China and shifting focus towards India, these three reasons are proving as a good reason for this growth.
JSW Steel:
Along with increasing profits, the company has been generous enough to their shareholders, increasing their dividends payouts y-o-y.
TATA Steel:
The real estate market is considered to be cyclical in nature.
The real estate market has its own ups and downs, an intelligent buyer should buy when the sector is in its down trend and when it is a buyers' market. Many consider the real estate a reflection of the economy because the demand for real estate is crucial for economic growth. Real estate is considered a cyclical industry because its demand side is impacted by economic cycles, and also because demand has historically outweighed supply. With the oncoming of Demonetization, GST and The RERA Act this sector has gone through a lot of scrutinization and a healthy correction, which was very much required. From here, with the unlocking of the economy, robust growth and demand, I personally do see a lot of growth and upside in the real estate sector not only for residential living but for industries and investment in land as well.
Price of land has increased by 15-20% in the metropolitan cities in India, with the deployment of metro corridor.
The government is also taking steps in helping the real estate sector recover by reducing stamp duty rates. Around 1 lakh new property registrations were recorded in Mumbai between September 2020 and July 2021 when the state slashed stamp duty to boost the real estate market during the pandemic lockdown. The state reduced the rate from 5% to 2% between September and December 2020, and from January 2021 to March 2021 the rate is fixed at 3%, overall a 270% increase in new registrations was seen.
So in short, investors need to know very well, how the economy is doing in order to take proper investment decisions. As mentioned earlier, real estate can be taken as a good indicator to know if the economy is flourishing or not. As land and real estate directly or indirectly affects every other sector.
SHIVAM M DAVE
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