Opt for stocks with higher safety margin; pharmaceutical and FMCG shares in demand amid market uncertainty.
At a time when both bulls and bears are uncertain about the market’s direction, investors are finding refuge in defensive stocks, where the margin of safety is relatively high.
Shares of several pharmaceutical, consumer durables and fast moving consumer goods (FMCG) companies have gained 10 per cent in the last three months. Not just that, some of them have even touched multi-year highs in this month.
| SECTOR-WISE PERFORMANCE | ||
| BSE sectoral indices | 1-month | 3-month |
| Consumer durables | 6.39 | 13.05 |
| FMCG | 3.03 | 11.84 |
| Healthcare | 2.75 | 8.81 |
| Capital goods | 4.50 | 5.56 |
| Realty | -1.42 | 0.50 |
| Power | -1.48 | -0.85 |
| Sensex | -1.96 | -2.03 |
| Auto | -6.53 | -2.46 |
| Bankex | -2.93 | -2.91 |
| IT | -1.00 | -3.90 |
| Metal | -4.76 | -6.58 |
| Oil & gas | -5.76 | -9.16 |
| Top 5 BSE Healthcare index gainers | 1-month | 3-month |
| Divi’s Lab | 10.40 | 26.03 |
| Ipca Lab | 14.60 | 21.96 |
| GSK Pharma | 3.72 | 20.01 |
| Cadila Healthcare | 2.25 | 19.16 |
| Lupin | -0.06 | 14.79 |
| Top 5 BSE FMCG index gainers | 1-month | 3-month |
| Dabur India | 18.35 | 21.51 |
| Hindustan Unilever | 5.38 | 18.08 |
| United Breweries | 0.10 | 16.26 |
| Godrej Consumer | 6.97 | 16.16 |
| ITC | 5.07 | 14.21 |
| Returns in %, as on June 16, 2011 Data compiled by BS Research Bureau | ||
In the last three months, the Bombay Stock Exchange (BSE) Consumer Durable index has gained 13.05 per cent, the BSE FMCG index has gone up 11.84 per cent and the BSE Healthcare index has added 8.81 per cent. During the same period, the exchange’s benchmark Sensex has fallen 2 per cent.
Stocks like Divi’s Laboratories (up 26.03 per cent), IPCA Laboratories (up 21.96 per cent), GlaxoSmithKline(up 20.01 per cent), Dabur India (up 21.51 per cent) and Cadila Healthcare (up 19.16 per cent) have delivered great returns to their investors in the last three months.
“There are not too many stocks which people can go and buy at present. The market is skewed towards good quality companies in certain sectors,” said Mehraboon Irani, principal & head, private client group, Nirmal Bang Securities. “People are putting money where the margin of safety is very high. Though valuations have become a little stretched in some of these stocks, I am still comfortable holding them because the business is good,” he added.
The demand for defensive stocks is such that some of them like Nestle India, GSK Pharmaceuticals, United Breweries, IPCA Labs, ITC and Dabur India have hit their all-time highs this month. Experts say it is a time-tested strategy to have defensive stocks in your portfolio when chances of the market going down are higher. “When the markets are in a bearish phase, if you have such stocks in your portfolio, they protect further deterioration in the value of your portfolio. These stocks don’t fall as much as the market,” said Mayank Shah, business head at Edelweiss Financial Advisors. “In times like these, we are advising our clients to have a heavy weight towards defensive and good dividend paying stocks,” he added.
The outperformance of defensive sectors in the last three months can be gauged from the fact that sectors such as metals and oil & gas have fallen sharply during the same period. The BSE Oil & Gas index has lost 9.16 per cent in the last three months, while the BSE Metal index has declined 6.58 per cent during the same time. Looking ahead, experts believe that investors’ preference for defensive stocks is likely to continue till the inflation and interest rate cycles come off from their peak. “Investor sentiment is getting polarised towards defensive stocks. Till we get clarity on the peaking out of the interest rate cycle, these stocks will be in demand,” said Pankaj Pandey, head of research at ICICI Direct, an online trading arm of brokerage ICICI Securities.
Today, the Reserve Bank of India (RBI) increased its key interest rates by another 25 basis points. This is the 10th time the central bank has raised interest rates in the last 15 months to curb headline inflation, which is over 9 per cent.
After the sharp rise, some of the defensive stocks in the FMCG sector are now looking expensive, experts say. “In terms of growth and valuations, I think stocks in the pharmaceutical sector are still cheaper than those in FMCG,” ICICI Direct’s Pandey said.
