Is Your Portfolio Ready For The Next Macro Shift

With the ongoing conflict in West Asia and growing uncertainty around the Strait of Hormuz, the global macroeconomic environment is feeling the impact of heightened geopolitical tension India, too, is facing disruption in fuel supply, higher inflation and potentially lower GDP growth. However, key fiscal metrics are still stable and reasonably healthy.

Identifying Cycles

There are broadly four phases in a business cycle. These are growth, recession, slump and recovery.

In the growth phase, both consumers and businesses feel very confident about their growth and financial prospects. Factories tend to run in all three shifts of the day. Businesses plan their expansion to cater to increasing demand. Employees feel confident about pay hikes and their ability to get multiple job offers. Consumers make regular discretionary purchases of white goods and also plan for vacations.

In contrast, during a slump phase, consumers and businesses are nervous about their prospects. Factories operate fewer shifts die to lower demand. There is idle capacity. Companies cut back on costs and capex. Employees face layoffs and salary cuts or pay freezes. Consumers cut any discretionary spends and remain conservative.

Structured Process

With some concrete parameters, it would be possible to identify the right sectors on the basis of the prevalent business cycle.

Macro parameters such as current account deficit, fiscal deficit, inflation, interest rates, credit growth, IIP growth etc. are considered. Investment indicators include capex investments, new projects cleared, capacity utilisation and so on. Business and consumer sentiment are measured by Purchasing Managers’ Index (PMI), business confidence index, sales of various discretionary products including white goods, ACs, cars, two wheelers and so on.

Then, there are global factors that include, US Federal Reserve’s rate action, developed markets growth and policy outlook, China’s growth and policy outlook, emerging markets’ prospects and so on.

Once the most suited sectors are identified, the best set of stocks within the selected themes are selected based on key financial metrics.

A few key aspects need to be noted about business cycle investing to make it effective. It is entirely a top-down approach to investing based on macro factors. Business cycle investing must not be confused or mixed with value, contra, special situations or growth styles.

Investments must be made across market capitalisations with no capping or minimum requirements for giving weightages to specific segments. There must also be no limits on any themes if the business cycle indications are positive based on macro factors.

Mutual funds allow retail investors to participate in business cycle opportunities that would otherwise be too time consuming and resource intensive to manage alone. Fund managers have strong research teams that continuously monitor all global and local macroeconomic factors. They also have rigorous in-house models to identify the right sectors for a business cycle and filter it down to suitable stocks. Both SIP and lump-sum investments become possible for business cycle investing done via mutual funds.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature