Business Cycle Investing A Tactical Edge in Market Volatility

A strategic approach to sector rotation based on economic cycles helps investors manage volatility and optimize returns

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After a relentless run for 3-4 years post the COVID-19 pandemic, the markets have seen deep correction over the past five months. As FPIs hit the exit button, corporate earnings decelerate, domestic growth slows, US trade tariffs hit several countries, and liquidity tightens, a turn of cycles is apparent, necessitating a new approach to making investment choices.

Business cycle investing, which involves smart juggling of sectors based on the phase of a business/ economic cycle in operation domestically and globally by considering several factors, may help navigate choppy markets.

Both businesses and economies go through cycles. There are four phases of any business cycle - growth, recession, slump and recovery.

Over the better part of the previous two decades, global interest rates were benign as inflation was low, liquidity was abundant as monetary policy was highly accommodative and geopolitical tensions were minimal. This mix of factors was highly positive for equity as an asset class.