Avoid volatile, high PE sectors

During a crisis, rely on historical data to buy stocks that are expected to do well.

Those who seek opportunities in adversity, will use the fall in the stock markets to make investments. The market has dropped by 15 per cnet in the last five months.

While most investors often lose confidence and exit during downtrend, the smarter ones stay put and even buy at those prices in the hope of a short term or long term rally. The obvious question for those looking to invest is, should you wait until markets go down further and then go for bargain hunting? Predicting market movement is not only difficult but impossible. But missed buying opportunities are thought of, in retrospect only.

At times of such panic, you need to look at your portfolio and ask some simple questions. Is the crisis going to affect the companies that you're holding? Does it alter the longer term fundamentals of your company's business? If the answer to this question is yes, then you should seriously consider trimming these stocks and add others.
 

This is the best moment for a value investor to invest in market. Choose companies that you understand well, that have strong brands with pricing power, low debt, efficient management and robust long term growth prospects. That's the perfect recipe for sailing through such times.

Look at the illustration in the table which gives the Sensex level at two crisis points and the absolute returns at current level. It shows, the market has surged from lows to high levels after a crisis. At the time of terrorist attack or sub prime crisis, investors who sold anticipating further drop may have benefited in short term but have lost a lot of wealth in long term.

Most of the economies in the world especially the developed ones are passing through low or negative growth. And developing economies such as India are no doubt going to be affected due to the same. However, the resilience that countries like India will show towards the crisis is much better than developed countries. India’s GDP is expected to grow at seven to eight per cent in the current year which is a good level in itself. This growth is likely to translate in boosting of the valuation of Indian corporates. In the interim period, there will be selling and portfolio reshuffling to adjust to new realities. But investors should take the opportunity to build a ‘quaility’ equity portfolio especially of blue chip stocks as they are expected to appreciate once the uncertainty in the western markets are over.

STOCKS TO INVEST IN
After being certain that the plunge in equity market can create long term wealth, you would be interested in knowing where to invest. Once could look at defensive sectors such as FMCG, power and pharma.This is because one can expect the current situation to have a limited impact of the profitability of such companies. Cipla, NTPC, NHPC, Tata Power, and Ranbaxy are some of the companies in this space.

Investors may also go for stocks which have a low price earning (P/E) or low price to book value (P/B) stocks. The reason for the same is that once again the downside will be limited. One could look at Cairn, IDFC, SAIL, Coal India, and Bharat Earth Movers Ltd among others.
 

STOCKS TO AVOID
Investors should avoid sectors which are volatile or have high P/E. Non-banking finance companies , capital goods and infrastructure companies in the realty and finance sector are been badly hit.Another sector that gets hit is the banking sector, due to its debt exposure to companies. But when the economy recovers, the sector is expected to give superior returns.

Also investors should avoid stocks where the promoter holding is low as these stocks have higher volatility.

The author is a free lancer