The newfound interest for 'defensives'! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

The newfound interest for 'defensives'!

May 24, 2004

Off late, one has been hearing a lot about the stock market becoming increasingly volatile (and likely to be) and therefore, investors have to be careful about the sector selection. The so-called stock markets experts are advising investors to stay clear of those sectors that are directly influenced by government policies and move into defensive sectors like software and pharmaceuticals! The reason - there is a change in the government! Before YOU, the retail investor, take any investment decisions, it is better to look at historicals and ascertain whether the 'so-called defensives' are 'actually defensives'. As a preface, lets understand what 'defensives' are in the first place.

Defensives are generally,

  1. Businesses that service the day-to-day needs of consumers and therefore, have a steady growth pattern over the long-term. Customers may shift from higher price to lower price products in a downturn, but consumption is not likely to be affected (basically, substitutable not replaceable).

  2. Not a capital-intensive industry by nature (or less asset intensive).

  3. Since these businesses have a steady growth pattern without significant capital expenditure requirements, cash flows tend to be stronger.

  4. Since cash flows are stronger, companies in these sectors have a consistent dividend paying track record over the long-term. So, even in a downturn, these companies are in a position to declare good dividends, which is a very key component in determining the overall returns for retail investors.

To our knowledge, Indian software and pharma stocks definitely do not fit into these defensive characteristics by any yardstick. Why?

  1. Indian companies in pharma and software sectors are still at a very nascent stage (we are 1.0% of the global pharma industry and 0.5% of global software sector). So, Infosys and Ranbaxy may be 'big' by Indian standards but not by global standards.

  2. Significant investment in R&D, manufacturing facilities (development centres in case of the software sector) and human resources are required. And the 'visibility factor' in fact is low in these two sectors for various reasons like geo-political disturbances, trade agreements and competition.

Yes, there are opportunities and we have a competitive advantage to take care of those opportunities. Yes, there are very good companies led by visionary managements. But that does not make them 'defensive' per se. The very reason - low government interference - in itself could be a flawed argument.

  1. What if service tax is increased from the current level of 8% to say, 16%? Software sector will have to shell out more towards tax and therefore, EPS will be affected. Already, bringing BPO into the tax net has been discussed. It is the case for pharma as well.

  2. What if the patent regime comes into play? What if the patent regime date is postponed from 2005 to 2007? It could make a big difference for both Indian and MNC pharma majors' plans.

  3. What if VAT (value added tax) is implemented? There could be a negative impact on the pharma sector in the short-term like it did in 4QFY03.

We are not trying to cull out the negatives to prove a point. But what we are suggesting is that the 'experts' could fail to indicate risks to you. Remember, there is no business that can come out unscathed in a downturn. But companies from the defensive sector are likely to be 'less affected' as compared to others in the event of a downturn.

So, don't get caught into this trap. There are a section of investors who depend on markets to arrive at a sense of direction. And there is a section of investor community that takes investment decisions based on one's own assessment and understanding. Figure out where you want to be!

Yes, there is a need to exercise caution at the current juncture. But don't let the stock market sentiment impact your choice.

Read what Mr. Ajit Dayal has to say about the stock market,

  • Why are stock markets falling?
  • The buying opportunity has begun...

  • Equitymaster requests your view! Post a comment on "The newfound interest for 'defensives'!". Click here!


    More Views on News

    The Gold and Silver Bull Market is Not Over (Fast Profits Daily)

    Sep 29, 2020

    The last few days have been nerve-racking for bullion traders. Stay calm. The bull market still has a long way to go.

    Earned Short Term Capital Gains on Shares? Here's What You Need to Know While Filing ITR (Outside View)

    Sep 29, 2020

    PersonalFN explains CBDT's clarification regarding scrip wise disclosure in ITR in case of short term capital gain.

    This Smallcap is a Must Have Stock in Your Portfolio (Profit Hunter)

    Sep 29, 2020

    Investing in this smallcap could open doors of huge, long-lasting wealth.

    Why the Market May Rally for a Few Days (Fast Profits Daily)

    Sep 28, 2020

    Why I think the market can rise for the next few days.

    My Top Pick for 2021 is Not a Stock. It is Something Much More Powerful (Profit Hunter)

    Sep 28, 2020

    My top pick for 2021 is something that has helped me and my subscribers beat the stock market by a factor of 2:1.

    More Views on News

    Most Popular

    Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

    Sep 17, 2020

    This leading household brand will profit big time in a post covid world.

    My Top Stock to Buy in this Market Selloff (Profit Hunter)

    Sep 22, 2020

    The recent correction offers a great opportunity to buy this high conviction smallcap stock.

    Can the Nifty Fall to 10,200? (Fast Profits Daily)

    Sep 24, 2020

    The Nifty has reached an important support level today. If it breaks then we could see further downside.

    What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

    Sep 18, 2020

    Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


    Covid-19 Proof
    Multibagger Stocks

    Covid19 Proof Multibaggers
    Get this special report, authored by Equitymaster's top analysts now!
    We will never sell or rent your email id.
    Please read our Terms


    Sep 29, 2020 (Close)