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2022 – Right Time To Invest in Defensive Stock in India?

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Defensive stocks: 2022 - Right Time for Defensive Investment
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Whether it is the pandemic, the Russia-Ukraine war, commodity price rise, or inflation-beating your door, taking shelter in defensive investments like FMCG, Healthcare, and Utilities to protect your portfolios from further damage makes perfect sense.

Let us understand what are defensive stocks, how you should pick them and why they should form part of the portfolio. So, let’s dive in.

When thunder roars, we find safely enclosed shelters to protect ourselves. However, what should we do when the bear roars in the stock market? Take a shelter in defensive stock in India to mitigate losses or prevent the portfolio from bleeding.

What are defensive stocks?

Let’s make it easier for you.

We all have two sets of people in our lives. One set is with you throughout your growing years, partying, flattering,  and enjoying with you. However, as soon as you experience a setback these people disappear.

The second group may not party with you all the time but you will find them when you need them the most. This set will lend a helping hand during your bad phases unfailingly.

The same is true in terms of stocks. The group that parties with you while growing is Cyclical stocks and the other set that is there with you throughout are Defensive stocks.

The stock market consists of two types of stocks, ‘Cyclical’ and ‘Defensive stocks’. Investopedia defines a defensive stock in India as a stock that provides stable earnings and consistent dividends regardless of the situation in the overall stock market. These stocks attract a continuous demand for their products, making them more stable during various phases of a business cycle. 

Cyclical stocks often give market-beating returns when the market is booming and experience a setback when the economy crumbles. On the other hand, defensive stock in India is immune to recessions and economic slowdowns, giving high returns even during difficult times.


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Beta Factor

A defensive stock’s price moves along with the market based on several factors like the beta of the stock, return on equity, and dividend yield.

Don’t you want to know what is beta?

Beta is a measure of the stock-price change compared to the overall stock market change. Defensive stocks usually have a beta of less than 1. A stock with a beta of 1 move at the same rate as the overall market moves whereas a beta of less than 1 would mean that the stock would move at a pace slower than the market on the upside as well as the downside.

Where Do You Find These Defensive Investments?

Unlike cyclical/aggressive stocks, it’s easier to find non-cyclical/defensive stocks. Here’s the easiest trick to find stocks for defensive investment.

Do you brush your teeth? Do you eat food every single day? Do you use electricity to power your appliances? Do you take medications when you fall sick? YES. One cannot survive without doing these things. So look for these companies and see if they are listed on the exchange. It’s that easy!

The Indian stock market and the economy are different from the USA. A few defensive sectors in the U.S. can’t be considered defensive bets in the Indian context. For instance, the Real Estate sector is considered a defensive sector in the US, and the reasons are obvious. In terms of infrastructure, the US is more developed than India. Our country still needs time to reach that level.

However, considering the initiatives the government has taken (and is taking) to improve infrastructure in the country, in the future, Indian investors may also look at the sector as a defensive bet.

In the Indian context, broadly, we can group the defensive bets into four categories – FMCG, Healthcare, Information Technology, and Utilities.

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Defensive Investments in Fast Moving Consumer Goods – (FMCG)

People buy fast-moving consumer goods or consumer staples out of sheer necessity regardless of economic conditions. Food, beverages, hygiene products, and several household items form part of FMCG. These stocks have long been and will always remain investors’ defensive bets. Because the demand for such products will never stop.  

Take a look at some of the listed Indian FMCG giants’ performance during the pandemic and over the last 10 years.

Companies1 Year Beta1 Year ReturnsReturns (10yr CAGR)
Hindustan Unilever Ltd.0.82-8%18%
Britannia Industries Ltd.0.651%30%
Nestle India Ltd.0.551%15%
Colgate-Palmolive (India) Ltd.0.33-10%10%
Tata Consumer Products Ltd.1.12-6%20%
Source: Infront Analytics. Note – The returns are as of 31 Mar 2022

Pharmaceuticals and Healthcare Defensive Stock in India

Along with FMCG stocks, companies that manufacture medical devices and medicines have classically been defensive bets. India has long been under-spending on healthcare. However, the government plans to introduce a credit incentive program worth Rs. 500bn to boost India’s healthcare infrastructure.

Budget 2022-23 allocated Rs. 86,200 crore towards health and family welfare, a hike of 16.5% compared to Rs. 73,932 crore in FY20-21 budgeted expenditure on healthcare. Because of these developments, we think pharmaceutical companies can play out as defensive bets in India.

Some pharmaceutical giants through which investors made a fortune for themselves.

CompaniesLong Term Beta1 Year ReturnsReturns (10 Yr CAGR)
Divi’s Laboratories Ltd.0.61-20%22%
Sun Pharmaceuticals Industries Ltd.0.6522%10%
Cipla Ltd.0.23-3%11%
Dr. Reddy’s Laboratories Ltd.0.69-21%10%
Source: Infront Analytics. Note – The returns are as of 31 Mar 2022

Information Technology

The IT sector is ever-evolving. With the advent of technology, data storing devices are getting tinnier, some are even floating in the air (Cloudification of data). However, that’s not true in terms of the industry and share prices of IT companies. Share prices of IT companies are appreciating every day, touching new highs. The Services sector is the largest sector globally, advancement in IT has played an important role in swelling the sector. And it’s attracting investors’ eyes.   

India was late in understanding the power of digitization (Information technology). However, today, we have two biggest IT hubs in the Asia Pacific – Bengaluru and Gurugram. Information technology stocks together form 15% of the NSE benchmark Nifty 50 index. These stocks have outperformed the broader market. During the Covid-19 lockdown, investors took shelter in IT giants like Tata Consultancy Services (TCS), Infosys, and Wipro to cushion their portfolios.

However, the IT sector is going through a downturn and may not make it to the list of defensive stocks now. The chief reasons are the US recession scare and the increasing interest rates that affect the multiples of IT companies more than others.

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Utilities the long-term Defensive Bet

Gas, electricity, water, and other utilities are part of everyday life. Utility stocks include companies that provide or deliver these services. In India’s context power companies like NTPC, Adani Power, Tata Power, GAIL and others make it to the defensive stock category. Such power stocks are defensive as people need power despite an economic decline. This fact makes the prices of defensive utility stock funds less sensitive to market fluctuations.

Take a look at some of the listed Indian Power Utility performers over the last 10 years.

CompaniesLong Term Beta1 Year ReturnsReturns (10 Yr CAGR)
Adani Power1.63141%18%
Tata Power1.1071%8%
Source: Infront Analytics. Note – The returns are as of 31 Mar 2022
Food For Thought

With the nature of the products and services companies produce and offer in this sector, despite your investing strategy, having defensive stocks in your portfolio is advisable. A well-diversified portfolio of Cyclical and Defensive stock in India can fetch better returns in the long term compared to a portfolio of highly-concentrated cyclical or defensive stocks.  

You can build your balanced portfolio either by doing your own research or getting help from experts like Research and Ranking. We don’t make promises which say “XX% returns “Guaranteed” within a week or so”. We assure our customers’ market-beating returns in the long term (+5 years). Don’t we know in a race of the Tortoise and the Hare, the tortoise continues to walk at his pace and wins the race?

 *Disclaimer: Please note that the names of stocks in this story are only for illustrative purposes and are not Buy, Sell or Hold recommendations.

Read more: How Long term investing helps create life-changing wealth – TOI 

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