NISM Certifications · NISM-Series-XV: Research Analyst · Industry Analysis
An analyst compares a cyclical industry and a defensive industry. The economy is expected to move from a boom into a recession. Which expectation is most consistent with industry analysis?
Cyclical industries like autos and capital goods will see sharper earnings declines in a recession, because demand for their products depends heavily on the economic cycle. Defensive sectors such as FMCG staples and utilities sell necessities, so their earnings are comparatively stable.
- AEarnings of automobile and capital goods firms are likely to fall more sharply than those of FMCG staples and utilitiesCorrect
- BEarnings of FMCG staples are likely to fall more sharply than those of capital goods firms
- CBoth groups will show identical earnings declines because demand is uniform
- DCyclical industries benefit from recessions because of lower input costs alone
Explanation
Cyclical industries such as autos and capital goods have demand highly sensitive to the business cycle, so earnings drop more in recession. Defensive sectors like FMCG staples and utilities sell necessities and show more stable earnings. Hence the other statements reverse or ignore this sensitivity.
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