The economic climate can cause stocks to rise or fall in the case of cyclical stocks. Investors looking for steady gains without the volatility caused by the economy could look at non-cyclical stocks, also called defensive stocks. A balanced portfolio will typically have both cyclical and non-cyclical stocks, with the latter representing a less risky approach.
What are non-cyclical stocks?
Non-cyclical stocks are stocks that do not tend to be affected by economic developments. Investing in non-cyclical stocks tends to be a strategy for the long term. Investors could look to benefit from consistent profits and revenues. A lot of these stocks also pay dividend.
As they can be considered safe haven investments, investors often focus on them during bear markets and recessions, but also as a strategy for diversification.
With their solid cash flows and stable operations, non-cyclical stocks tend to outperform the market when economic activity slows. It also means that they can often withstand dire circumstances where the survival as businesses is threatened in a bear market. This is because people do not want to or cannot cut down on the goods and services these businesses provide, such as basic needs for survival.
What is the difference with cyclical stocks?
On the other hand, cyclical stocks share prices fluctuate over relatively short periods of time based on economic conditions and business cycles.
Stocks that rise during periods of consumer spending and drop during recessions – with their share prices affected by a drop in demand and therefore earnings – are cyclical stocks. These economy-sensitive stocks tend to be high risk, high return.
With non-cyclical stocks, fluctuations and volatility aren’t as prevalent, given the lack of correlation to economic activity.
Cyclical and non-cyclical stocks are categorised based on different definitions by analysts. What might be sensitive to the economy by one definition, might not be seen as affected as much by the economy by another. That’s why we recommend to research what best suits your risk profile.
Which sectors are non-cyclical?
Non-cyclical industries include healthcare, utilities, food and beverage, tobacco and household and personal products. Many tend to be consumer staples that are always in demand because of people’s basic needs. For example, power and water are considered non-cyclical sectors because demand for them stays relatively constant.
However, there are also consumer cyclical stocks, which are as the name suggests cyclical, such as restaurants and apparel companies. These tend to perform well when consumer spending is up. Stocks in banking and real estate are cyclical as well.
Technology stocks aren’t clearly cyclical or non-cyclical, as it depends on the company. For example, semiconductor stocks tend to be non-cyclical as they are always needed, while gaming stocks are based on demand during different economic times, making them cyclical.
Some investment banking stocks were not hit by the COVID-downturn, so it could be argued that they are non-cyclical stocks. However, they may not be immune to economic trends, so as always, diligent research would be a good idea.
Examples of non-cyclical stocks
- Procter & Gamble Company: A multinational US consumer goods company that owns almost 80 brands mainly in the beauty and healthcare markets. Some of its names include Pampers, Always, Swiffer, Head & Shoulders, Pantene, Oral B, Vicks and Gillette.
- Mondelez International: Mondelez is active in the food & beverage industry. One of the largest snack companies in the world, the company has brands such as Oreo, Ritz, LU, Cadbury Dairy Milk, Milka and Toblerone. These represent biscuits, baked snacks and chocolates.
- Coca-Cola Company: The maker of the most popular drink in the world has grown to owning a beverage portfolio of more than 200 brands and thousands of beverages around the world, from soft drinks and waters, to coffee and teas. This includes Costa Coffee, Schweppes, Fuze Tea and more.
- Sanofi: A French multinational pharmaceutical and healthcare company focusing on specialty care, vaccines, general medicines, and consumer healthcare. It has a broad set of technology and manufacturing platforms, including in mRNA.
- SSE PLC: The UK-based energy company has core businesses in economically regulated electricity networks and renewables. This includes onshore and offshore wind farms, hydro schemes, electricity transmission and distribution networks, flexible power stations, carbon capture and hydrogen storage, solar, and battery storage, as well as providing energy products and services for businesses and other customers.
Some ETFs containing non-cyclical stocks we offer on our platform:
| ETF | ISIN |
|---|---|
| Invesco US Consumer Staples Sector UCITS ETF | IE00B435BG20 |
| Xtrackers MSCI Europe Consumer Staples ESG Screened UCITS ETF 1C | LU0292105359 |
| SPDR MSCI Europe Consumer Staples UCITS ETF | IE00BKWQ0D84 |
| Lyxor STOXX Europe 600 Healthcare UCITS ETF - Acc | LU1834986900 |
| iShares STOXX Europe 600 Food & Beverage (DE) | DE000A0H08H3 |
Note: Some ETFs may not be available on our platform for your country (temporarily) due to regulatory reasons.
How to invest in non-cyclical stocks
If you're thinking about investing in non-cyclical stocks, here are some tips you can consider:
- Educate yourself: Learn about the differences about cyclical and non-cyclical stocks and make an assessment whether non-cyclicals suit your risk appetite.
- Research different types of non-cyclical stocks: There is a huge spectrum of different non-cyclical stocks, so familiarise yourself with different sectors and companies as well as their financials and prospects. Even within a specific sector, there are differences between companies and how their stocks perform.
- Diversify your portfolio: Spread your investments and consider buying switching up non-cyclical stocks with cyclicals or other investments to ensure you are working toward your financial goals.
Pros & cons of non-cyclical stocks
Pros of investing in non-cyclical stocks:
- Stable investment income: Investing in non-cyclical stocks can open up opportunities to gain stable returns. These companies tend to benefit from steady profits and revenues, regardless of macroeconomic trends and business cycles. They are solid earners whether times are good or bad, offering potential protection against an economic slump.
- Diversification: Non-cyclical stocks generally represent low-risk investments, which can make them an opportunity to offset high-risk, volatile stocks that might also be part of your investment strategy. Investing in non-cyclical stocks can provide diversification benefits, as these companies operate across various sub-industries such as healthcare, consumer staples, utilities and more.
- Safe haven potential: Unpredictable economic activity can have an impact on cyclical stocks. Non-cyclical stocks, however, are more likely to withstand recessions and panic selling is more unlikely during periods of economic uncertainty.
Cons of investing in non-cyclical stocks:
- Missing out on bull runs: Positive sentiment around a stock is often tied to economic conditions. Since non-cyclical stocks are mostly unaffected by economic cycles, this also means that high returns can be less common and bull markets can lead to smaller gains. Business models tend to be solid and are not characteristic of extreme high-growth conditions.
- Predictability: Investors who love taking risks may not be satisfied with the returns of non-cyclical stocks. Typically seen as predictable, these stocks aren’t likely to experience high highs and low lows, making them safe haven investments rather than, for example, day trades.
- Different definitions of non-cyclical stocks: It is important to diligently do research around what stocks actually constitute non-cyclical stocks. According to some analysts, technology companies and banking stocks can be seen as non-cyclical stocks. However, it can also be argued that they are still vulnerable to economic shocks and so aren’t non-cyclical stocks.
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