After all the recent weakness in the markets, it could be a great time to pick growth shares to hold for the long term. On top of that, cyclical businesses can produce decent capital growth for stock investors when coming out of a downturn.
In his book Beyond The Zulu Principle, legendary investor Jim Slater wrote in praise of the cyclicals. He said in some years, cyclicals outperform growth shares “by a wide margin”. However, the tricky part of investing in cyclicals is the timing.
There could be better conditions ahead
Perhaps I’m mad to be considering the cyclical companies now alongside potential growth share investments. They’ve been under pressure for months. And Slater pointed out that cyclical businesses tend to fare worse when interest rates are rising.
But I think the recent rises in interest rates have done much to push cyclical stocks lower. And one of the key tactics, as I see it, is to pick cyclical stocks when they are near the bottom of a cycle. But, of course, that’s easier said than done.
However, the stock market looks ahead. And I reckon interest rates will top-out and begin to ease in the months ahead. One thing that could put downward pressure on interest rates is a weak economy. And that could be especially true if inflation starts to fall.
Slater said the best time to invest in cyclicals is when interest rates are falling and when the value of the pound sterling is rising. And my guess is we could soon see both those conditions. In fact, since bottoming in late September, the value of the pound against both the US dollar and the euro has been trending higher.
Robust company results
But trying to read the financial markets like that is as good as reading the tealeaves in the bottom of my cup. The main driver of my decision to include fallen cyclicals alongside growth shares is that they look to me as if they have found the bottom. Not in all cases. But many bombed-out cyclical shares are backed by businesses that have been delivering robust trading statements.
I’m bullish about the economy, businesses and UK shares for the medium to long term. And, therefore, I’m prepared to embrace the risks of share ownership now.
For example, I like the look of Somero Enterprises. The business designs and makes concrete levelling, contouring, and placing equipment worldwide. And strategic engineering and environmental consultancy business Ricardo has caught my eye. As has social housing energy services company Sureserve.
There’s no guarantee that investing in these three companies now will produce a positive long-term outcome in my portfolio. And Slater cautioned that “all companies do better when the economy is prospering and find the going tough when it’s in the doldrums.”
Nevertheless, I’m looking beyond short-term difficulties in the economy and in the markets and investing for the long term. I already hold Somero shares and am considering the others.