Tuesday, May 31, 2011

Defensive stoks are safe bets in volatile markets

The stock market has been facing turbulence for some time now. Rampant inflation, high interest rates and slow earnings growth have colluded to dampen the prospects of the equity markets in the short term, and it seems that the pain will persist for a while. Several analysts have already revised the earnings estimates downward due to the recent bout of discouraging results from India Inc.

This doesn't mean that you should press the panic button. There are some themes that will shine amid this downslide. These are the defensive stocks, which outperform the markets during a bearish phase and are safe bets in a volatile climate. Here's how you can provide a cushion to protect your portfolio by allocating some money to these stocks.

Defensive bets in a downturn
FMCG: These companies produce the most common necessities, which are picked off the shelves at all times. Their purchase pattern is not affected by monetary constraints. Soaps, detergents, cooking oil, toothpaste and, to an extent, food products and beverages, are in constant demand. ITC and Godrej Consumer Products are the top analyst picks.

Healthcare/Pharma: Companies manufacturing pharmaceuticals or medical equipment, or even those providing medical services, such as test laboratories, can boast stable revenues in a harsh economic climate. The demand for medication remains immune to such conditions. Lupin, Glenmark Pharma and Aurobindo Pharma are the favoured stocks among analysts.

Utilities: Basic services, such as electricity, gas, water and sanitation, are used by consumers through economic ups and downs. The companies that provide these to people are among the steadiest performers. Power Grid Corporation , CESC and PTC India are among the top picks in this segment.

When the economy turns sour, small- and mid-cap stocks are hit the most severely as investors don't have confidence in their ability to sustain the turmoil. Most investors flock to the relative safety of large-caps and blue chips to help them tide over the downslide. The strength of the balance sheet, management quality, high market share and earnings visibility lead investors to believe that the company will weather the storm. While this is usually the case, not all blue chips make for safe investments.

First, these are not cheaply available as they usually trade at expensive valuations. Not all blue chips are worth buying at such levels even for the long term. Second, some of these may already have reached a point after which further growth comes at a very slow pace. A good example is Hindustan Unilever. As such, the upside for many of these stocks is very limited.

However, holding some select blue chips in the portfolio can provide the much needed stability to your returns. For novice and conservative investors, buying blue chips is a prudent decision. The ideal candidates are the ones that are not sensitive to economic cycles, have the ability to generate free cash flows and, therefore, dividends.

So be choosy even while picking from the top layer in the stock market. Finally, as safety is of utmost importance at such times, try to remain diversified across sectors in order to reduce your risk. As Parmar advises, "In these circumstances, investors may focus on certain blue-chip companies which remain cash flow positive and have little or no leverage on their books.

Source: www.economictimes.com

Ravi Jhawar
Summer Intern-Technical Analyst
DENIP Consultants Pvt. Ltd.

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