Hi
This is an important question, and thanks for raising same. The quest hunted me so much I am going back to 10 years of Indian history to deep dive into winners of Indian stock market. Preliminary indications absolutely goes in line with what you were saying or what we call cyclical are clear winner. Rest you can read here:
But wealth creation or buying a stock is combination of business, management and valuation. Hence if we buy cyclicals at good valuation or at time of uptick trend it can create good wealth and that’s what has happened in India. So lets get a fact straight you can create wealth still by buying any type of stock.
The thesis here was made on “good business quality”. Commodity type of business will suffer from non-differentiated products, economic cycles (both up and down), lesser entry barriers. Now imagine a company with differentiated products with a brand can sustain earnings for a long time. Problem lies here in india is two fold 1. There are very few companies exist 2. the valuations are steep for such companies.
The best test for you is to see the valuation impact of auto and pharma during economic downtick. Though I would like to request don’t go by growth story much. Growth has to be backed up by economic profit (profit generated by operations minus cost of capital for funding such operations). If growth comes without economic profit it will destroy economics i.e. shareholders, company and banks ; everyone connected with value chain.
Hope it provides some clarity.