Business Cycle and Industry Sector Performance

Index of concepts

1. Aa to Az   2. Ba to Bz   3. Ca to Cz   4. Da to Dz     5. Ea to Ez   6. Fa to Fz   7. Ga to Gz   8. Ha to Hz   9. Ia to Iz 10. Ja to Jz 11. Ka to Kz 12. La to Lz 13. Ma to Mz 14. Na to Nz 15. Oa to Oz 16. Pa to Pz 17. Qa to Qz 18. Ra to Rz 19. Sa to Sz 20. Ta to Tz 21. Ua to Uz 22. Va to Vz 23. Wa to Wz 24. Xa to Xz 25. Ya to Yz 26. Za to Zz

Subject: Investment Analysis

Chapter/Topic: Industry analysis

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Concept Definition and Explanation

 

Many analysts believe that relative performance of industry sectors is related to the stage of the business cycle. At certain stages in the business cycle certain sectors show a relatively greater price increases in their share prices. Analysts who believe in these patterns switch their funds from one industry or group of industries to another industry or group of industries to out perform the general market or market index.

 

A stylized idea regarding relative out-performance is that towards the end of recession financial stocks outperform. The loan demand recovers and share broking activity picks up as investors and traders start buying equity shares. Companies sell new securities and merger activity goes up. Thus, as the recession is nearing the end banks and stock broking companies outperform. Once the economy begins recovery, consumer durable goods firm see an increase in demand for the produce. Companies producing cars, refrigerators, air conditioners, and personal computers etc., outperform other industries.

 

Once there is upswing in the demand of the consumer durable goods companies, demand for capital goods industry picks up. Hence at this stage, capital goods sector outperforms other industries.  Towards the peak of the business cycle, there is a heavy demand on the basic materials. Their prices skyrocket and the shares of this industry group outperform.

 

During a recession, consumer staple companies suffer relatively less decline in demand and hence they outperform in a falling market.

 

 

References:

Reilly, Frank and Keith Brown, Investment Analysis and Portfolio Management, 7th Edition, Thomson-South Western, 2003

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Knols

 

 

 

Related Knols

INDUSTRY ANALYSIS AND VALUATION - INDIA

The Industry Life Cycle, Sales growth and Profit Margins

 

 

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Books

 

 

 

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Research Papers

 

Dynamic Asset Allocation Using Systematic Sector Rotation

Sector Rotation and Monetary Conditions

Sector Rotation over Business-Cycles

Sector Rotation under Partial Information

 

 

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Concept Articles

 

 

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