Indicators of Boom-and-Bust Cycles
What are the various indicators of the Economic cycles?
Many high-frequency indicators can act as a useful predictor of market cycles. Some commonly used gauges in India include:
- GDP Numbers
- Index of Industrial Production data
- Core Industries growth
- PMI Composite
- Bank Credit Growth
- Import Export Data
- Interest Rate Trajectory
- Corporate profitability
- Peak Power Demand
- E-way Bill Generation
- Railway freight traffic
- Diesel & Petrol consumption
- Tax Receipts - GST Collections
- Passenger Vehicle Sales
- Tractor Sales
- CPI & WPI Inflation
- Steel consumption
None of these measures should be seen in isolation to infer about the state of the economy. These indicators are meant to be surveyed in conjunction with each other in order to arrive at a rational conclusion about the quality of the market cycle.
How should you position yourself?
It is seemingly impossible to call out market tops and bottoms. Instead, one must adopt the pyramiding approach while investing. Add slowly to your total position once the stock starts moving in your favor.
Boom periods- In a structural bull market, one must be overweight on equities. This simply means that suppose you have an overall allocation of 50%-70% of your wealth in equities, then make sure it is closer to the upper end of the range. As a strategy, ride the momentum and do not be in a hurry to book profits. The use of trailing stop losses will help to lock in gains. Passive investors can opt for ETF's or simply go long in futures contracts on the index. Mutual fund investments via the SIP route is also a viable option. Active and seasoned investors may bet on sectoral outperformance/underperformance using ETF's or stock indices.
Bust periods- Tackling bearish market moves are much more difficult than navigating the former. Remember, liquidity is king in a bearish market. Bet on defensives such as FMCG and Pharma. Investors who are anticipating a bearish market ahead must re-allocate a portion of their portfolios to other asset classes such as gold, government bonds and liquid funds. One may also short futures contracts on the Index.
Till now, we have covered all the facts about business cycles, their different stages, and what causes them. Now, we will turn our attention to cyclical stocks, how to analyze them and discuss their exit strategies in the upcoming units of our module.