Long-term investment in equities is one of the best ways to create sustainable long-term wealth. But there can be plenty of challenges, too, in the form of stock market corrections.
Stock market corrections can happen for numerous reasons like economic slowdown, terrorist attacks, military conflicts, trade wars between countries, depreciation of the rupee, rising oil prices, political or global instability, etc. Whatever the reason 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.
When it thunders, we find safely enclosed shelters to protect ourselves. However, what should we do when the bear roars in the stock market? Take refuge in defensive stock in India to mitigate losses or prevent the portfolio from bleeding.
What are defensive stocks in India?
Let’s make it easier for you.
We all have two sets of people in our lives. One group 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 always party with you, 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. Again, the group that parties with you while growing is Cyclical stocks, and the other set with you throughout is Defensive stock.
The stock market has 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. As a result, 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.
Four steps to finding good defensive stock
A defensive stock’s price moves along with the market based on factors like the stock’s beta, return on equity, and dividend yield. Don’t you want to know what beta is?
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 slower pace than the market on the upside and the downside.
Include Blue-chip Companies In Your Long-term Investment Portfolio
Blue-chip companies in the stock market are generally considered safer investments because they can generate profits even during an economic downturn. In addition, they have a very stable growth rate and are less prone to volatility than companies still in the development stage.
Include FMCG, Logistics, and Healthcare Companies In Your Long-term Investment Portfolio
FMCG, logistics, and healthcare companies in the stock market are considered safe sectors to invest in, which can help your long-term investment portfolio beat a bear market. This is because their share prices increase slower than cyclical stocks, but their downfall is also limited during an economic downturn.
During the global financial crisis of 2008 between January 2008 till April 2009, when the market recovered, the FMCG sector lost just 3% compared to the Sensex, which lost 55%.
Include Dividend-paying Stocks In Your Long-term Investment Portfolio
Investing in high-quality, dividend-paying stocks is a time-tested way to protect your collection against uncertain times. When markets are directionless during periods of volatility, dividends can provide some relief against significant losses. In addition, it is proven that businesses with a long record of paying dividends are often better managed.
The next economic downturn may be around the corner or happen after ten years. Nobody can predict that. Including good defensive stocks in your investment portfolio can ensure your investment portfolio not only weathers any recession but will be the first to recover and outperform.
Where Do You Find These Defensive Investments?
Unlike cyclical/aggressive stocks, it’s easier to find non-cyclical/defensive stocks. So here’s the easiest trick to find stocks for defensive investment.
Do you brush your teeth, eat food daily, use electricity to power your appliances, or 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 US can’t be considered defensive bets in the Indian context. For instance, the Real Estate sector is regarded as a defensive sector in the US, and the reasons are apparent. 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.
Defensive Investments in Fast Moving Consumer Goods – (FMCG)
People buy fast-moving consumer goods or 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.
Look at some of the listed Indian FMCG giants’ performances during the pandemic and over the last 10 years.
|Companies||1 Year Beta||1 Year Returns||Returns (10yr CAGR)|
|Hindustan Unilever Ltd.||0.82||-8%||18%|
|Britannia Industries Ltd.||0.65||1%||30%|
|Nestle India Ltd.||0.55||1%||15%|
|Colgate-Palmolive (India) Ltd.||0.33||-10%||10%|
|Tata Consumer Products Ltd.||1.12||-6%||20%|
Pharmaceuticals and Healthcare Defensive Stock in India
Along with FMCG stocks, companies manufacturing medical devices and medicines have classically been defensive bets. India has long been underspending 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 crores towards health and family welfare, a hike of 16.5% compared to Rs. 73,932 crores in the 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.
|Companies||Long Term Beta||1 Year Returns||Returns (10 Yr CAGR)|
|Divi’s Laboratories Ltd.||0.61||-20%||22%|
|Sun Pharmaceuticals Industries Ltd.||0.65||22%||10%|
|Dr. Reddy’s Laboratories Ltd.||0.69||-21%||10%|
The IT sector is ever-evolving. With the advent of technology, data-storing devices are getting tinier; 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 globally. The advancement in IT has played a crucial role in swelling the industry and attracting investors’ eyes.
India was late in understanding the power of digitization (Information technology). However, today, we have two of the biggest IT hubs in the Asia Pacific – Bengaluru and Gurugram. Information technology stocks 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. The chief reasons are the US recession scare and the increasing interest rates that affect the multiples of IT companies more than others.
|Companies||Long Term Beta||Daily Beta (one month range)||1 Year Returns||Returns (10yr CAGR)|
|Tata Consultancy Services (TCS)||0.89||0.60||415||18%|
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.
Look at some of the listed Indian Power Utility performers over the last 10 years.
|Companies||Long Term Beta||1 Year Returns||Returns (10 Yr CAGR)|
Food For Thought
With the nature of the products and services companies produce and offer in this sector, having defensive stocks in your portfolio is advisable despite your investing strategy. A well-diversified portfolio of Cyclical and Defensive stocks in India can fetch better long-term returns than a highly-concentrated cyclical or defensive stock portfolio.
You can build your balanced portfolio by researching or getting help from experts like Research and Ranking. Of course, we don’t promise “XX% returns “Guaranteed” within a week or so.” But, 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.