[Beginner's Guide to Stock Investing] What Does 'Cyclical' Mean When They Say to Focus on 'Cyclical' Industries?

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] When reading securities firm reports or economic articles, you may have often seen the word 'cyclical.' This word, which evokes 'cycle' or 'circulation,' refers to what and what meaning it holds will be explained.

"When the US sneezes, Korea catches a cold"

Before understanding cyclical, it seems easier to first understand our economic structure and the peculiarities of the Korean stock market. As you know, Korea is a country that lives on 'exports.' This also means a high degree of external dependence. External dependence refers to the proportion of exports and imports relative to the Gross Domestic Product (GDP), and a high external dependence means that trade occupies a large portion of our economy.

With high external dependence, domestic demand is less influential compared to the impact from other countries trading with Korea. Therefore, our stock market inevitably reacts sensitively to the global economy and stock markets. Now you understand why stock investors check US economic indicators and react sensitively to US interest rate hikes, right?

What does 'cyclical' mean?

[Image source=Yonhap News]

The economy cycles. You may have heard that the economy has a certain cycle. It repeats boom and recession in a regular cycle, which is called the economic cycle. Industries that react sensitively to these economic cycles are called cyclical stocks in the stock market.

In short, cyclical means industries that ride the cycle. Their performance can be good or bad depending on the economic situation. When the economy improves, sales increase, profits rise, and stock prices go up; conversely, when the economy worsens, sales and profits decrease, and stock prices fall. The structure links corporate performance and stock prices according to the economic cycle.

What kinds of stocks are cyclical?

So, what kinds of stocks are considered cyclical? Representative examples are shipping and shipbuilding industries. Simply put, when the economy is good, trade is active, right? When the global cargo volume increases due to a good economy, shipping companies that make profits through transportation by ships earn money, and orders for more ships increase, boosting the shipbuilding industry.

Other typical cyclical industries include steel, chemicals, refining, finance, construction, machinery, semiconductors, and automobiles. This is because their sales and profits increase when the economy improves.

What should you be cautious about when investing in cyclical industries?

[Image source=Yonhap News]

Since they are sensitive to the economy, you need to consider factors that affect our economy.

A representative factor is the won-dollar exchange rate. The appropriate time to invest in cyclical industries is when the won-dollar exchange rate is on a downward trend. A falling exchange rate means the Korean won is strengthening, right? Conversely, the dollar weakens.

The concepts of won weakness and strength may not be immediately clear. Simply put, a strong won means the value of our currency is higher. Suppose the exchange rate rises from 1,000 won per dollar to 2,000 won per dollar. In the past, you could buy 1 dollar with 1,000 won, but now you need 2,000 won to get 1 dollar, meaning the value of our currency has dropped. This is called won 'weakness.'

Next, you should look at the economic situation of the European Union (EU). The EU accounts for most of the global trade volume. Especially since the EU has significant trade volume with China, the EU's economic recovery can also be interpreted as China's economy improving. The EU's economic recovery is a barometer of global economic recovery. The reason Korean cyclical industries have been sluggish can also be attributed to the EU's economic downturn.

Earlier, we learned what cyclical means, which stocks are cyclical, and what to be cautious about when investing in cyclical stocks. From an investor's perspective, especially for beginners, you might wonder how to know which point in the economic cycle our economy is currently passing through. It may not be a clear answer, but I would like to say this: investors should always be immersed in the world of investing. This means you should not stop investing just because the economy seems to be worsening. Even if you do not trade, you should continuously observe the market. Over time, investors will develop a sharper eye for the market. Today, I support the wise investments of all beginner investors.

Editor's Note[Beginner Investor Guide] is a smart investment guide for 'Joorini' (stock + child). We will kindly and easily explain unfamiliar stock stories to beginner investors.

This content was produced with the assistance of AI translation services.