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Tuesday, October 28, 2008

Defensive Investment Strategy - Best to adopt in Bear Market

With the Indian equity markets on a downhill, investors are left with no other option but to be on the defensive. And why not? Defensive sector stocks are the safest place to park your funds in these volatile times.The growth prospects appear bright and the consumer discretionary sector has been least impacted by the current slowdown. History is also on its side. Consumer stocks have always performed better when the times have been uncertain and journey tough. Here's an insight into why it makes sense to invest in consumer stocks, and how they can help you sail through the rough waters ahead.

For the uninitiated, defensive stocks are essentially companies that tend to perform steady under complex economic conditions. The stocks are usually from sectors such as FMCG and healthcare that are considered to be less risky than sectors such as capital goods, banking and automobile. Elaborates Mukesh Gupta, director of Wealthcare Securities: "These stocks generally belong to diverse sectors and are difficult to define. They can be divided on the basis of products into personal care, processed food and household products.

Inherently, these stocks are less volatile, don't get influenced considerably by short-term market trends and their prices fall less in the event of a downturn." Take for instance, the performance of consumer stocks such as Hindustan Unilever, Colgate-Palmolive (India), Nestle India and Sun Pharmaceutical Industries in the last three months. These stocks have all delivered single or double digit three-month returns on the BSE, even as stocks from other sectors are offering negative or little returns during the said period. Analysts advise that investors should typically increase their exposure to consumer stocks during bear attack, since these stocks tend to underperform during a bull run. Currently, most of the consumer stocks are quoting at one-year lows.

The numbers are pretty encouraging. The FMCG market has been growing more than 10% growth since 2005 and is expected to grow at a compounded annual growth rate of 10-12 % over the next few years.

The penetration of many product categories in the segment is still low, and thus, the growth potential of the FMCG industry looks promising.

Growth of agricultural income year-on-year ensures bright prospects for penetration into the rural areas as that segment has been by far the least penetrated. With a constant increase in the per capita income over the last five years, the Indian consumer is headed for a better life-style.

Since the per capita income in India is much lower than the other developed world, the potential for growth is very high.

According to financial planners, investors should ideally allocate around 20% of their core portfolio in consumer discretionary stocks in current times. The portfolio allocation, however, is subject to change depending on the market dynamics.

Considering the bloodbath has punished sectors across the board, consumer stocks have provided a safe haven for investors in the last few months.

This is one sector, feel analysts, which will not disappoint in major turbulence. CNX FMCG index has given an average return of around 18% in the last five years. You can expect a return of 15-18% in this sector. However, keeping in mind the current scenario, when investing in equity, you should have a minimum investment horizon of three to five years.

Favourable demographics, higher income level, low penetration and growing per capita consumption.

India's per capita consumption remains the lowest in the world across categories.

Strong rural growth backed by higher agricultural incomes and increase in the value of land which is leading to more money in the hands of farmers.

The good monsoon augurs well for the sector as it would help keep rural growth intact.

Increase in pricing power as most companies have passed on the cost push inflation to consumers via a judicious blend of price hikes, package size reduction and change in product mix.

Proliferation of retail trade which currently accounts for 5% of sales but is growing at around 25-30%.

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