THE SOUTH AFRICAN INDEX INVESTOR

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Investment Philosophies, Theories and Practices (continued…)

 

Investment Opportunities in an Economic Cycle

 

Most of the time, financial markets attempt to predict the state of the economy, typically six months into the future.  This means the market cycle (bull market, market top, bear market and market bottom) is usually well ahead of the economic cycle. For example, when the economy is in a deep recession, the market will look ahead at possible signs of recovery, and if it does find some evidence thereof  stock prices will start to move up.

 

But important to remember:  certain sectors of business profit more than others in certain stages of an economic cycle. Therefore, some investors and traders try specifically to invest in sectors which offer relative value to others in anticipating that those sectors will benefit from a specific stage of the economic cycle—otherwise known as sector rotation.

 

The following table describes the different stages and typical characteristics of the economic cycle. The diagram (next page) shows those business sectors that proved historically to be successful investments at certain stages of the economic cycle.

 

However, be warned: this is not a infallible method of investing; external factors or unforeseen events may play havoc with the eventual outcome of one’s bet on the performance of certain sectors.

 

     

Economic Cycles

Full Recession

Early Recovery

Late Recovery

Early Recession

 

 

 

 

 

 

 

 

State of the Economy

Consumer expectations have bottomed

 

 

Industrial production has bottomed

 

 

 

Interest rates are falling

 

 

Yield curve is normal

 

 

Consumer expectations are rising

 

 

Industrial production is growing

 

 

 

Interest rates have bottomed

 

 

Yield curve steeper

Consumer expectations are beginning to decline

 

Industrial production is flattening out at the top

 

 

Interest rates are rising

 

 

Yield curve is flattening

 

 

Consumer expectations are at their worst

 

Industrial production is falling

 

 

 

Interest rates are at their highest

 

Yield curve is flat or inverted