Analysts favour defensive bets as hedge against equity market downturn

From defensives, Nifty Pharma index has led gains so far in calendar year 2024 with a surge of 11 per cent, followed by Nifty IT, which is up 4 per cent while Nifty FMCG has shed 6 per cent

The recent market downturn led by broader indices is making analysts favour defensive sectors on bets that the current volatility will continue in the near term.

Defensive stocks are those that tend to hold up better than the overall market during periods of volatility or economic weakness. 

The Nifty50 index is now down over 2 per cent from its all-time high of 22,527 it touched on March 11. The losses in the Nifty Midcap 100 and Smallcap 100 indices from their record highs made on Feb 8 are sharper at 6 per cent and 11 per cent, respectively. 

Given this, analysts suggest that investors should keep some allocation to defensive pockets in order to protect themselves against any steeper market fall ahead.

“For the next few months, some exposure to defensives is required. Even if they may not rally too much, they will still offer protection to investors in a possible downturn,” said Deepak Jasani, head of retail research, HDFC Securities.

Sharing this view, Kranthi Baithni, equity strategist at Wealtmills Securities, suggests exposure to defensive stocks should be increased in a ‘staggered’ manner as markets will likely consolidate at least till the general elections. “The time is right to add defensives for the medium term,” he said.

From the defensive pack, the Nifty Pharma index has led gains so far in calendar year 2024 (CY24) with a surge of 11 per cent, followed by Nifty IT, which is up 4 per cent. The Nifty FMCG index, on the other hand, has slipped nearly 6 per cent. In comparison, the Nifty50 benchmark is up just 1 per cent for the current year.

Pecking Order

Of the three defensive sectors, analysts prefer IT and Pharma pockets over FMCG as they believe the duo can still perform relatively better in an event of a market decline ahead.  

Moreover, according to Amit Kumar Gupta, founder of Fintrekk Capital, allocation to defensive stocks means investors don’t expect too much of an upside but pharma and IT stocks have defied this in the last few years. 
 

Going ahead, selective bets in the two segments could still act as good defensives even if there might not be a stellar rally, he believes. 
 

"IT services may not grow much until AI projects get accelerated. Similarly, recent rally in largecap pharma like Dr Reddy's, Cipla and Zydus Life is more or less done. Still, both the pockets will not fall as much and can defend against a possible sharp decline ahead as several fund managers have recently moved into large-cap IT and pharma from mid-and-small caps," Gupta said.
 

That said, the FMCG pocket remains the least favorite of analysts as its high dependance on rural demand, which has not seen any meaningful recovery in several months, continues to be an overhang.

"We are a little cautious on FMCG as its growth trajectory is uncertain given the rural markets remain tepid. We will have to wait and watch, especially, the agricultural output of the rabi season ahead," said Jasani of HDFC Securities.

Thus, consumer staples will not be good defensives ahead, as per analysts. But they add that those in the discretionary consumption category can still be looked at given the likely benefit of rate cuts ahead.