Defensives versus high beta. What should your stock strategy be?

With the frontline indices – the S&P BSE Sensex and the Nifty 50 – crashing over 35 per cent from their peak levels given the rampant spread of coronavirus (Covid-19) pandemic across the globe, most analysts remain cautious on the road ahead for the markets. Going ahead, they believe the markets will track developments related to the progress of the health scare and how effectively can the governments combat it.

That said, they do believe long-term investors with risk appetite and those who can digest volatility can start nibbling at stocks given the attractive valuations.

So, what should your stock strategy be? Is it better to allocate more towards defensives or look at high beta names that can deliver handsome returns once the markets recover?

While JP Morgan believes ‘cash is king’ given the uncertainty that lies ahead, selective buying from a long-term perspective can be done in defensive plays. Before investing, investors must evaluate companies carefully and put money in stocks of only those companies with strong balance-sheet and earnings visibility despite the Covid-19 health scare, they suggest.

“The backdrop of a sell-off across asset classes led by COVID-19 fears means our strategy is set with the primary objective of capital preservation with cash in hand until volatility recedes. We would be selective buyers within Indian equities, albeit with a defensive bias. Our preferred sectors are consumer staples, healthcare, large retail private sector banks and utilities,” wrote Rajiv Batra, Kevyn H Kadakia and Sahil Dhingra of JP Morgan in a recent report.

Meanwhile, most agencies, including Moody’, have trimmed their forecast for economic growth in India as measured by the gross domestic product (GDP) for financial year 2020-21 (FY21). Fitch Solutions on Monday slashed its estimate for India's GDP growth in 2020-21 to 4.6 per cent due to weaker private consumption and contraction in investment amid coronavirus outbreak.

Moody’s Investor Service (Moody’s), on the other hand, trimmed its economic growth forecast for India to 2.5 per cent for calendar year 2020 (CY20) even as it expects the growth to bounce back to 5.8 per cent in 2021 (CY21).

Saion Mukherjee, managing director and head of India equity research at Nomura expects the markets to remain choppy in the near-term. The spread of COVID-19 cases in India, he says, and the impact on the broader economy and earnings in the near-to-medium term will keep the markets volatile.

“Fundamentally, we find market valuations are attractive after the recent intense sell-off. In the near-term, in case the COVID-19 outlook in India improves, we expect a bounce back in high beta sectors such as Financials that underperformed in the fall,” Mukherjee wrote in a recent co-authored report with Neelotpal Sahu.

From a one-year perspective, Nomura remains overweight on select financials, oil & gas and healthcare sectors. They have downgraded infrastructure and cement to underweight; and are also underweight autos, consumer and IT services. Reliance Industries (RIL), ICICI Bank, Axis Bank, Dr Reddy's Labs and Lupin are their 'buy-rated' top picks.