South African investors love to panic. One red day on the app and suddenly your portfolio owes you money. But not all shares fall the same way. Some bounce back like a rugby ball at Newlands; others go down harder than your uncle at an open bar. Welcome to defensive vs cyclical stocks.
By The Money Maze | Listen to the episode: Spotify
The difference between defensive and cyclical stocks is simple to say and hard to live with. One tracks the economy’s mood swings. The other sells stuff people buy regardless. Knowing which is which helps you decide when a falling share price is noise and when it’s a real problem.
Cyclical stocks: the party animals
Cyclical shares are tied to the economic cycle. When things are booming, with bonuses, new couches and weekends away, these companies rake it in. When interest rates climb, jobs disappear or the rand does the Zumba, they get clapped first.
Typical cyclical sectors on the JSE:
- Hotels, leisure and casinos: holidays and gambling are the first luxuries to go.
- Furniture and big-ticket retail: that old couch can survive another year.
- Car dealers: a new bakkie is easy to postpone.
- Construction and building materials: projects stop when money is tight.
- Miners: commodity prices swing with global growth.
Cyclicals aren’t bad investments. Bought at the right point in the cycle, they can deliver big returns. The trouble is that the right point usually feels terrifying at the time.
Defensive stocks: the boring legends
Defensive shares sell essentials: food, medicine, healthcare, basic toiletries, and services people can’t easily cut. You still buy paracetamol, bread and rooibos in a recession. You might switch to no-name beans, but you’re still buying beans.
Typical defensive sectors:
- Food retail and food producers.
- Pharmacies and healthcare.
- Household and personal care products.
- Telecoms and some utilities.
Defensive businesses tend to have steadier earnings and more reliable dividends. The trade-off is slower growth, and investors often pay a higher valuation for that stability. Boring is rarely cheap.
The quick test
Ask one question: would people still buy from this company in a recession?
- A supermarket: yes, maybe with a smaller trolley. Defensive.
- A furniture retailer selling on credit: probably not. Cyclical.
- A hospital group: you’re still going to hospital. Defensive.
- A casino: weekends away get cut first. Cyclical.
Real companies are messier. A retailer can be defensive in what it sells but cyclical in its debt levels. A defensive company with a weak balance sheet can still get into trouble. Use the test as a starting point, not a verdict.
What the Covid crash taught us
In early 2020, the JSE All Share Index fell roughly a third in about two months, bottoming in mid-March. Nearly everything fell. That’s the first lesson: in a true panic, even defensive shares drop, because investors sell what they can.
The second lesson came after. Businesses that kept trading through lockdown, like pharmacies and food retailers, recovered faster. Hotels, casinos and airlines faced months of closure, raised emergency capital, and some took years to get back to pre-Covid earnings. Cyclicals bled. Defensives bruised.
Sector rotation: the market’s mood ring
Professional investors often shift money between cyclicals and defensives as the outlook changes. This is called sector rotation. When rate cuts are coming and growth looks set to pick up, money tends to flow into cyclicals like retailers, banks and builders. When a slowdown looms, it drifts back to food, healthcare and telecoms.
You don’t need to play that game, and timing it well is hard even for full-time fund managers. But it explains why cyclical shares often start rising before the economy visibly improves. The market is pricing in the recovery months ahead. By the time the good news is on the front page, a chunk of the move has often happened.
Measuring it: beta
Beta measures how much a share moves relative to the market. A beta above 1 means the share tends to move more than the index; below 1 means it moves less. Cyclicals usually have higher betas and defensives lower ones. Our episode on beta, volatility and defensive vs cyclical stocks goes deeper on the numbers.
When to hold, when to panic
- Don’t panic over dips. Everything falls in a crash. If the business and balance sheet haven’t changed, a lower price isn’t a broken company.
- Worry when the story changes. If a cyclical’s industry faces structural decline, or debt becomes unmanageable, that’s not noise.
- Check the balance sheet before the storm. Cyclicals with high debt are the ones that issue shares at the bottom. See our explainer on gearing and working capital.
- Balance both. Cyclicals for growth, defensives for stability. Together, sanity.
Think of it like bakkies. Cyclical is the turbo double-cab: fun, fast and expensive to fix. Defensive is the old single-cab: boring, but it gets you through floods, droughts and the odd zombie apocalypse.
Stokvel Starter Pack
- Cyclical stocks: earnings rise and fall with the economy.
- Defensive stocks: sell essentials; steadier earnings in downturns.
- Beta: how much a share moves relative to the market.
- Structural risk: a lasting change, not a temporary dip.
- Balance: a mix of both smooths the ride.
Takeaway: When the market turns redder than a braai fire doused with Castle Lager, don’t dump everything. Know what you own, check whether the story has really changed, and let the portfolio breathe.
Want the full braai version? Listen on Spotify. And if you’d like the Maze in your inbox, join the free Maze Mail list.
More from The Money Maze
- Beta, Volatility and Defensive vs Cyclical Stocks
- Rebalancing, Asset Allocation and Diversification Explained
- Gearing Ratio, Current Ratio and Working Capital
- Bonds and REITs in a JSE Portfolio
Sources
- Correction, bear market or crash? Why words matter, Optimum Investment Group.
- SA’s stocks crash as government scrambles to limit spread of virus, BusinessDay, 17 March 2020.
- Covid-19 crash: what South Africa can learn from previous market crashes, Accountancy SA.
This is not financial advice.