• The economy grows in waves, with good years and ones that are less good. In periods of growth, demand for products and services increases. Companies raise their investments and take on new staff to meet this demand. Unemployment falls, incomes rise and we all buy more things. When growth slows down, we see the opposite pattern.
We refer to this sequence of waves as an economic cycle.
Cyclical businesses are ones that surf the waves of this economic cycle. They perform best during the economic good times, but demand for their products or services shrinks when the economy slows down.
Investing in the shares of cyclical companies offers both benefits and drawbacks. They are the first to register a profit when the economy recovers from a recession. But when times are less good, they are also the first to take a hit. Movement in the share price of companies from cyclical sectors tends to be a little stronger than that of firms in non-cyclical ones. It is important therefore to choose the right moment to invest in cyclical stocks.
You can opt as in investor to put your money into everyday items: the car you drive, for instance, the clothes you wear, the TV on which you watch your favourite series in the evening, with a glass of your favourite drink. We call these things consumer goods.
We also differentiate within the consumer goods category between non-cyclical and cyclical.
Baby food, toothpaste, bread and so on are non-cyclical: we use them every day and we don’t stop using them, even when economic times are harder. Demand for goods like this generally remains stable, regardless of whether the economy is growing or slowing down.
Car companies, by contrast, are a typical example of cyclical firms as they need a strong economy to achieve decent revenues. You don’t buy a new car when you’re out of work or are worrying about losing your job.
Did you know that...
… the Chinese market for luxury goods continues to grow.
Chinese consumers purchase around 35% of all worldwide luxury goods, such as expensive watches, designer clothes, handbags and champagne. They are the driving force behind growth in the sector. And while virtually the entire world continues to wrestle with the coronavirus, the Chinese economy is back to its old self.
China is traditionally a country where great importance is placed on status symbols. Designer goods and travel have become an important goal for a steadily growing middle class, which views them as a token of success. The importance of this will only increase further as Chinese prosperity steadily rises. Chinese consumers will thus continue to deliver a boost to the luxury industry.