High-beta stocks are back in limelight amid a “risk-on” rally in Indian shares. If there is more leg to the current rally, these stocks will continue to outperform the broader market, experts say.
Beta represents the comparable returns of a stock, relative to the benchmark index, say, Sensex. So, if a stock exhibits more volatile returns compared to the market, it will have high beta. This is also a reason that typically a stock with high beta tends to rise or fall faster that the markets.
Among the BSE200 stocks, 73 stocks had a beta greater than one. These stocks have given whopping 52 per cent returns on an average from the time the markets made their bottom on December 20 last year. This is almost three times the returns given by the Sensex, and more than double the returns generated by the stocks having less than one beta.
There is a lot of juice left to the rally, says Saurabh Mukherjea, head of equities, Ambit Capital. It is primarily given the quantitative easing in Europe. Back home expected cut in interest rates by the RBI. “Keeping both the global and the domestic issues in mind, I think it is right time to enter into the high-beta stocks with strong balance sheet,” he adds.
Till about last year, most of the investors and fund managers were sitting on low-beta stocks or the less volatile stocks that were supposed to be helping them in the falling markets as they tend to fall less.
For instance, stocks like Nestle India, which has the lowest beta of 0.15, had given a positive return — of about 11 per cent — during the period when the Sensex fell by almost 26 per cent from its peak in November 2010 to the bottom in December last year. During this time, IVRCL, which has highest beta of 2.05, had fallen more than 80 per cent.
However, as the tide turned in favour of the high-beta stocks, IVRCL has more than doubled (106 per cent returns) from its low, whereas Nestle has gained just six per cent and Sensex has gained 19 per cent. “From a stock market perspective, 2011 was all about low beta and defensive names,” according to Suresh Mahadevan, managing director and head of equities, UBS Securities (India). Among them, he lists ITC, Hindustan Unilever, TCS, Infosys, HDFC. “I think 2012 will be risk-on. High-beta stocks like ICICI Bank, L&T, SBI, M&M will do well,” he adds.
Along with the rally in the markets, most of the high-beta stocks have already seen a run-up in share prices. Analysts believes that the investors should be cautious in terms of selecting stocks. For, in the event of correction in the markets, they could lead to an erosion in returns.
“If you want to ride the market rally,” notes Sonam Udasi, Head of Research, IDBI Capital, “you could add some part of the portfolio to high beta stocks. But, one should also be aware of the risk associated with such stocks.”
Most of the high-beta stocks come from the cyclical sectors. The lists of the stocks suggest that most of the high-beta stocks are from sectors like construction, real estate, banking and metals, which to some extent are cyclical and the interest rate-sensitive. However, these are the same sectors that have again got the investors attention as the markets started to factor in possible gradual reduction in the interest rates.
Generally, the markets do things in extreme, according to Ramesh Damani, member, BSE. “What we are seeing at this stage is that the cats and dogs are moving up,” he told Business Standard in a recent interview. “However, six months into this bull move, we could see movement in cyclicals and interest rate-sensitives.”
