Cyclicals back in favour

Just as ICI, Hoechst, Bayer, Rhone-Poulenc, Monsanto and other giants managed to steer their product portfolio away from low-growth cyclicals, cyclicals have - as they do - come full circle.

For the past five years investors have poured cash into high growth, high technology firms but recent market surges in commodity industries in the US, UK, Europe and even in Latin America show sentiment is changing. Belief that cyclicals are too far undervalued has tempted investors back.

But producers knew bulk industrial chemicals would make a comeback and this trend is the pendulum they sought to avoid. With the troughs being too long to make the peaks worth their while, they moved out.

While this market movement is encouraging it may be months before investors see an actual increase in return of their investment.

The conditions that caused a rebound in cyclicals may also be their downfall. Low inflation of the late 1990s was partly to do with low commodity prices. If this trend continues and economies begin to grow, central banks may be forced to raise interest rates to keep a lid on inflation. The last time cyclical commodities impoved was in 1993. The next year the US reserve raised interest rates, halting both inflation and growth.