Counter Cyclical Stocks Definition : Traditionally, companies in industries with stable demand, such as pharmaceuticals and food, are considered counter cyclical stocks. Explanation: As the term suggests it usually refers to stocks opposite of cyclical stocks. The stocks move in the opposite direction of the overall economic cycle ie rise in weakening economy and fall in strengthening economy. These stocks belong to companies in industries with financial performance which is negatively correlated to the overall state of the economy. Thus the stocks price will also tend to move in a direction that is opposite to the general economic trend. Hence appreciating during times of recession and depreciating in times of economic upturn. Generally, it is harder for companies to become counter-cyclical, because it is fairly difficult to find a business model that thrives in a period where most people do not have money. Purchasing counter-cyclical stocks can serve as a good hedge to the standard recessionary pressures that can cause most stocks to decline. Counter-cyclical strategies may work in uncertain times for investors with deep sector insights and with relatively longer investment horizons. Example : Out sourcing companies do well during unfavourable economic conditions as companies prefer to not commit resources.
Posted on: Thu, 25 Dec 2014 12:13:11 +0000
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