How Do You Invest In Uncertain Times?

In the last one month i.e. from August 10, 2015 to September 9, 2015, the Sensex has given a return of negative 8.5 per cent and on a yearly basis the return is negative 5 per cent. With this kind of a market fall, retail participants are very jittery as they see their wealth eroding. They start doubting the equity markets and begin to look upon fixed deposits as a safer option. This article focuses on industries which are relatively resilient to such market falls. The study focuses on 492 companies on the list of BSE 500.

In the present context it is believed that foreign portfolio investors (FPI) are fleeing the market as they anticipate FED to increase the rates, thereby making dollar borrowing more expensive and also because they are leveraged they wish to close their positions across countries and convert money into dollars. United States, Switzerland, Germany and some other developed countries have very low rate of borrowing and retail and institutional investors invest in emerging markets like India, China, Brazil and Russia by borrowing money in their home currency. So when the local government is expected to increase the rate of interest, this would increase the borrowing rate for retail and institutional investors, forcing them to pull out money from the emerging markets and decrease their leveraged positions or borrowings. This results in a sell-off in emerging economies.

In the current situation we can see that there is a sharp fall in the Indian share market and the Indian rupee is depreciating against the dollar. This is a clear indication of FIIs or FPIs selling their stakes and taking the money to their home countries. The approximate amount of sell-off by FPIs in August 2015 was around Rs 22,000 crore. With this kind of sell-off there would be very few companies which can hold on to their valuations. The depreciation of Indian currency is advantageous to exporting companies and to companies which receive revenue in dollars as this would translate to a higher rupee profit.

During such a period of market uncertainty retail investors have few choices:

1. Stay out of the market till the uncertainty settles down.

2. Purchase additional shares of companies with strong fundamentals which are in their portfolio since purchasing shares at lower prices would help them to decrease the average price of acquiring the shares.

3. Focus on purchasing shares of companies which export goods or services to developed countries.

We have a few industries where a large source of revenue is dollar-denominated and hence these companies do well when the FPIs are selling their shares in the market and converting their money into dollars.

We have used the industry classification benchmark (ICB) to re-group all the 492 companies for a consolidated view of the industry:
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As can be seen, healthcare, which consists of 39 companies, has outperformed all the other sectors. The mean return of all the 492 shares in the last one month is around -12 per cent whereas the fall in the healthcare sector is -6 per cent. If we look at the mean returns of the last three years we can see that there are three sectors which have consistently outperformed the average CAGR. These are consumer goods, healthcare and technology. Some of the companies in the healthcare sector have also recorded an increase in share prices in the last one month as these companies would benefit from the dollar-rupee relation. The prices of a few companies like Dishman Pharmaceuticals & Chemicals Ltd., Abbott India Ltd. and Lupin Ltd. have increased in the last one month.

Companies in the consumer goods and technology sector like La Opala R G Ltd., Ceat Ltd., Eclerx Services Ltd., Cyient Ltd. have given an average monthly return of 8 per cent. If we compare the prevailing uncertainty in the market to the uncertainty that prevailed in 2007-2008 even though the reason of uncertainty was quite different, we find that even in 2007-2008 the mean return for these 492 companies was -5 per cent whereas the healthcare sector’s mean return was around -2 per cent. All this historical evidence suggests that the healthcare sector is the most resilient and during times of uncertainty retail investors can take an exposure to this sector. If the rupee continues to weaken this would benefit some of the companies in the industrial and technology sectors.