Cyclicals make their move

For the last two years, cyclical stocks have languished. Investors holding cyclicals have largely seen their wealth getting destroyed during this period. That changed with 2016. Cyclicals have actually turned out to be the best wealth creators this year, beating the traditional defensives by a large margin. Figure 1 shows how cyclicals have largely underperformed during the last two years and then turned around. Why was 2015 a tough year for cyclicals? A number of factors came together to make 2015 a forgettable year for cyclicals. Commodities, which include metals and crude, saw one of their worst periods in a long time. Crude crashed by half to hit $40 per barrel by the end of last year. Demand for metals, like iron ore and steel, melted as China saw unprecedented demand weakness. Banks remained under pressure as RBI governor Raghuram Rajan's provisioning policy forced banks to do NPA provisioning that had never been seen on that scale before. A weak monsoon further exacerbated an already weak demand environment for umpteen core-sector players. Things appear to be changing this year Cyclicals are seeing a change in fortunes beginning this year. In fact, cyclicals have beaten traditional defensi