Cash is king! Investing strategies to ride out choppy markets

They turn cautious and prefer defensive bets

The recent market volatility triggered by central bank actions has made analysts cautious and they suggest investors remain stock-specific. Among sectors, they believe defensives, such as fast-moving consumer goods (FMCG) and pharma, remain the best bet to ride out this uncertain phase.

Those at Jefferies, for instance, believe the Nifty50 can retest 15,500 levels. The key question, they said, is which stocks shall be defensive in view of this potential decline in the markets as the trends keep changing.

“FMCG, power utilities, and pharma will be good defensive plays. On the other hand, realty, non-banking financial companies (NBFCs), metals, and industrials can be more vulnerable. The undisputed defensive is, of course, cash,” wrote Mahesh Nandurkar, managing director at Jefferies, in a report, co-authored with Abhinav Sinha. They have hiked allocation to cash in their model portfolio by 3 percentage points by reducing weighting on financials (LIC Housing Finance has been removed).

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Based on their analysis, several outperformers since the October 2021 market peak, have tended to underperform in subsequent corrections, and vice-versa. While autos, industrials, realty, and materials outperformed in last rally (June 2022-September 2022), Jefferies believes they could now be vulnerable and prone to a correction. NBFCs, too, may incrementally face challenges as cost-of-funding pressure potentially undermines their position vis-a-vis banks.

“We are currently in the fourth correction since the Nifty’s October 2021 peak. Barring health care and FMCG (consistently defensive), the sector performance has varied during the periods of corrections. The same should continue in this correction, as well. IT services will be vulnerable as concerns may emerge on the revenue growth outlook. Select PSUs like NTPC and Power Grid should serve well as defensive,” Nandurkar and Sinha wrote.

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At the bourses, classic defensive plays -- health care and FMCG indices -- have outperformed the markets by rising around 3 per cent and 0.5 per cent, respectively, since September 2022. High beta plays, such as power, oil & gas, realty and auto indices, underperformed. In comparison, the S&P BSE Sensex slipped over 2 per cent during this period, data show.

While investors bought health-care stocks as a defensive bet amid uncertainty, the rise in FMCG stocks was fuelled by a sharp fall in palm oil and crude oil prices, analysts said.

As a strategy, analysts at Emkay Global, too, have made subtle adjustments to their portfolios, and are now more in favour of defensives.

“We continue to add defensiveness incrementally to our portfolio, by shifting some allocation away from metals and cement, and toward FMCG and pharma. We see some large-cap IT stocks as relatively defensive, after their relentless underperformance calendar year-to-date (CYTD),” their analysts wrote in a recent note.

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Buy for the long term

That said, analysts expect global markets to stabilise over the next few months which, they believe, will aid sentiment back home. Valuation-wise, too, the Indian markets, they said, remain attractive from a medium-to-long-term perspective.

“Global equity markets are unlikely to fall sharply from here and volatility is unlikely to last beyond a month or two. Nifty trades at a reasonable valuation of 18.6x FY24 (estimated) EPS of Rs  929. The domestic market is set for a return of around 15 per cent in the next year. Risks to our view would be any war triggered in Taiwan or by North Korea, and any possible success by the Opec+ in taking up oil prices much beyond $100 a barrel,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.

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Analysts at Prabhudas Lilladher maintain a Nifty target of 20,936 level as their base-case scenario, 22,918 level as the bull-case scenario, and 15,800 as their bear-case scenario. “We expect the current state of volatility to be temporary and recommend accumulating fundamentally strong stocks for medium-to-long-term gains,” wrote Amnish Aggarwal and Anushka Chhajed of Prabhudas Lilladher in a recently co-authored note.