‘Instability and volatility in the markets can spell “panic and pandemonium” for most investors. However there are also a group of investors sitting cool and staying calm throughout this turbulence. What is the reason for their composure?
Yup, you guessed right: They put their money in industries that were poised to benefit during an economic slowdown – meet the business cycle investors.
The four stages of the business cycle are expansion, peak, contraction, and trough. Essentially, it is the circular movement of an economy as it moves from expansion to contraction and back again. The business cycle is characterised by four stages; namely:
So how does one discern the stage that the cycle is currently in? There are many variables and industry dynamics to look at, one of them being the leading and lagging indicators.
Leading indicators look forward at the road ahead.
They predict possible changes in the economy; for example when manufacturers’ orders increase, higher levels of productivity is likely to follow as more people are hired to fulfil the orders. Wealthier consumers will also be more generous with their retail spending.
Lagging indicators are like how you look backwards at the road you have travelled.
The phenomenon of rising unemployment rate and a hike in consumer prices will show up following the months after an economic downturn.
Every cycle is different, and we can see different sectors performing differently depending on the economic conditions. Holding a highly diversified portfolio is a good way of tracking the business cycle while dispersing risk across industry sectors.
If you are wondering about whether the allocation of your portfolio is optimised for your needs, do connect with me and I will be happy to share my insights with you.
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