Investors should invest in defensive stocks in a downturn. These stocks tend to perform better during a recession. Defensive stocks remain stable through the various phases of a business cycle.
They, however, tend to under-perform during an expansion phase. They earn profits regardless of economic gyrations because they produce or distribute goods and services always needed, such as food, power, water and energy. Share prices of stocks within defensive industries tend to grow at a relatively stable rate that can often be predicted with some degree of accuracy, based on historical trends. Some of the defensive sectors you can invest in:
Telecom
One sector that is bucking the trend of constant negative news is telecom. Telecom is adding on consumers at a breakneck speed. The figures released by the Telecom Authority of India (TRAI) for the month of October show an unprecedented 10.5 million users added. The mood in the telecom sector seems upbeat despite the slowdown in the economy. During 2008, the telecom sector has grown at 33.4 percent as compared to 35 percent in the previous year. There is a slight dip in the figures this year. However, when compared to the growth figures in other sectors, it is way ahead.
Mobile 3G services are expected to roll out in the country by March 2009 and Wi-Max auctions too would be completed by the end of January 2009. Analysts say rural telephony, 3G, WiMax and data services will drive the sector's growth up to 2012. In 2012, 3G services would have just begun to spread in India and mobile entertainment and mobile banking are likely to be the biggest drivers for data services. The total telecom subscriber base is expected to reach 690-700 million by 2012 to include 640-650 million wireless users and 45-50 million fixed line users.
Engineering and capital goods
The recent slowdown in the industrial sectors may impact growth momentum of the capital goods sector in the short term. However, the infrastructure development package announced recently holds promise for engineering companies. The order books of many companies in this sector are strong, leading to visibility of earnings in the near future. There has been a growing consensus among policymakers that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. This will lead to larger participation for private sector companies in large infrastructure projects.
The gap between supply and demand for power increasing. So, power equipment companies can look forward to increase in revenue from power generation and distribution, as the government will be forced to augment the supply side. There is a thrust on development of new wells and improvement of output from old wells in the oil and gas space. This will lead to more projects for engineering companies.
Oil and gas
There has been a radical change in the government's approach to E&P (exploration and production) activities in the country. In order to enhance the energy security of the country, the government has increased its thrust on exploration, leading to substantial investments in this sector. All these investments have yielded results in the form of discovery of oil in Rajasthan and gas in the KG basin. Thus, post-2009, enhanced production of oil and gas in the country will be seen. The demand growth for oil and gas will outperform supply growth for some time to come.
The unmet demand for natural gas in India is estimated to increase from about 113 million standard cubic metres per day (mmscmd) in the financial year 2008 to 396 mscmd by the year 2022. Demand for petrol, diesel and jet fuel are expected to grow at a compounded annual rate of 1.7 percent, 2.5 percent and 2.2 percent respectively till 2010. The medium-term outlook for refining margins looks positive, due to robust growth in demand.
FMCG
The FMCG companies are showing resilience in the face of the economic slowdown. The sector had witnessed higher sales growth in the inflation environment. Farm loan waiver, satisfactory monsoon and employment generation schemes have put money in the hands of the consumers to spend. Hence, the longterm fundamentals of the sector, both in terms of breadth (number of consumers using) and depth (existing consumers) continue to remain strong.
With the cooling of commodity prices, FMCG companies have further reason to cheer. Products in categories like coconut oil, oral care, skincare products would benefit with the reversal of commodity prices. As the sector has a domestic focus, the possibility of an impact of the global slowdown on these companies is limited.
Source: Economic Times Article
