Structural vs cyclical investments: The play between short term gains and long-term alpha

The discussion took place at PMS AIF World's Crystal Grazing 6.0 event on 14th February.

In an ever-fluctuating market, investors often grapple with the choice between short-term cyclical plays and long-term structural investments. While cyclical opportunities may offer rapid gains, seasoned money managers often argue that structural trends provide compounding benefits over extended periods.

During a recent discussion PMS AIF WORLD's Crystal Grazing 6.0 event on 14th February, market experts highlighted the fundamental differences between cyclical and structural opportunities.

PMS AIF WORLD is a modern, alternates focused investment platform designed specifically for High Net-Worth Individuals (HNIs) and prioritises wealth creation through alpha-driven investment strategies.

According to Manoj Bahety, co-founder and portfolio manager at Carnelian Asset Management, cyclical investments—such as commodities and certain industrial sectors—can generate significant short-term returns (25-35 percent over 12-18 months). However, structural investments offer a more stable trajectory, compounding at 15-18 percent annually over 15-20 years, Bahety argued.

The key distinction, as Bahety explained, lies in control. In commodity-driven businesses, factors like global demand, supply chain disruptions, and geopolitical tensions influence profitability, making them inherently cyclical. In contrast, businesses in consumer goods, pharmaceuticals, and financial services often possess the ability to drive sustainable growth beyond temporary market conditions.

Yet, the distinction between cyclical and structural investments is not always clear-cut. Madangopal Ramu,head of equities and fund manager at Sundaram Alternates highlighted that all businesses experience some degree of cyclicality, with the primary difference being the length and stability of their growth cycles. He cited companies like Bajaj Finance and Cholamandalam, as examples of names that have demonstrated structural growth by continuously expanding their market presence and sustaining a 25 percent growth rate. In contrast, he stated that PSU banks have remained cyclical, with their performance largely dependent on corporate lending cycles.

Also Read | Trust and returns: Wealth management leaders on the formula for building a successful business

“Management plays a crucial role in defining whether a company remains cyclical or evolves into a structural growth story,” Ramu emphasised. He further highlighted companies like Trent, which expanded from Westside to Zudio, and exemplify how innovation and market expansion can drive sustainable long-term growth. However, he believes that truly long-term structural success stories, like Bajaj Finance, are rare in India’s markets as most companies offer a maximum of five years of solid growth before they face new challenges.

The conversation also addressed the limitations of forecasting and valuation models. Geetika Gupta, Senior Fund Manager- PMS & AIF, ICICI Prudential AMC cautioned against the over-reliance on long-term predictions, stating, that even management teams of companies often struggle to predict their own business trajectory beyond a few years.

Gupta also highlighted that while discounted cash flow (DCF) models remain a useful valuation method, their reliability diminishes beyond a two-to-three-year horizon. “Valuation models can give a false sense of precision. The further out you go, the more variables can change, making long-term projections inherently uncertain,” Gupta explained.

In addition, another layer of uncertainty that often alter stock performances is the impact of market sentiment on fund flows. Stocks often witness a surge in demand ahead of their inclusion in major indices like MSCI, which makes it imperative to time investment decisions.

Ultimately, while structural investments remain the preferred route for long-term wealth creation, the evolving nature of sectors means that investors must continuously reassess their strategies. The market experts also discussed the case of DMart, highlighting that even companies with strong structural fundamentals face new challenges—such as the rise of quick commerce—forcing them to adapt to an ever-changing economic landscape.

Also Read | Banking's big moment: Vikas Khemani, Sunil Singhania bullish on the sector amid changing market trends

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.