Russia-Ukraine crisis: Investors look at defensive plays in tough times

A wave of global headwinds has continued to batter global equity markets since the beginning of calendar year 2022. With the Russia-Ukraine crisis, the sentiment has soured even more, as investors turned cautious amid rising commodity prices on likely supply crunch.

The growing jittery sentiment has not spared domestic equities either, which have been highly volatile in the past few weeks and may continue this trend at least in the short term, or until a resolution appears on the horizon for geopolitical tensions, say experts.

Given the multitude of uncertainties on the global front, the markets have seen sharp corrections in February, with the benchmark BSE Sensex and the Nifty50 indices slipping around 5 per cent each. In comparison, the broader markets have seen a much higher fall, with mid- and small-caps losing over 6 per cent and 10 per cent, respectively, during this period, reveals ACE Equity data. The correction from a calendar year-to-date (YTD) has been sharper.

Given the volatility, analysts suggest investors choose stocks wisely and look at defensive plays within the information technology (IT), fast-moving consumer goods (FMCG), and health care space, believing these could be the safest bets for investors in the present scenario.

On a YTD basis, the BSE IT Index has corrected 12 per cent, while the BSE FMCG Index has demonstrated better performance, with a relatively smaller cut of 6 per cent.

The BSE Healthcare Index, meanwhile, has fallen 11 per cent so far this year. In comparison, the benchmark Sensex has shed 4 per cent.

“It is a good strategy to look at defensive stocks. Investors can start to buy gradually. Pharmaceutical and FMCG stocks are factoring in a lot of the bad news. The sharp spike in commodity prices is well known now. A fall in FMCG stocks can provide a good entry point over the next few days,” says A K Prabhakar, head of research, IDBI Capital.

Prices of key raw materials have continued to inch higher in the last few weeks and months, with both palm and crude oil at multi-year highs and materially above the levels in the December quarter.

Product price hikes will likely persist, say analysts, which could further delay a potential volume growth recovery. In addition, the mismatch on timing (input cost inflation versus product price hike) will likely weigh on gross margins, caution analysts at Jefferies.

“Staple stocks have corrected 15-30 per cent from their 52-week highs. While there have been some earnings downgrades, valuations have still derated and are now close to five-year averages across most companies based on current estimates — of course, earnings downside risk persists,” wrote analysts at Jefferies in a recent note, while maintaining a ‘Buy’ rating on Hindustan Unilever (HUL), ITC, Godrej Consumer, Britannia, Colgate-Palmolive, Varun Beverages, and Emami.

Among the lot, Prabhakar prefers Dabur, HUL, and Britannia in the FMCG sector; Gland Pharma, Biocon, and Sun Pharmaceutical Industries in the health care category; and Zensar, Wipro, and HCL Technologies within the IT pack.

Meanwhile, Amit Kumar Gupta, portfolio manager, Adroit Financial Services, is bullish on hospitals within the health care category. He believes these players will be largely insulated from the current headwinds and foreseeable interest-rate hikes.

“Hospitals are a much safer bet as there is a capital expenditure cycle which is now coming to an end for most of these players and medical tourism is seeing a revamp which was earlier affected due to Covid-19. Hospitals may see a bit of impact of raw material inflation, but they have sufficient margins to take care of that,” he adds.