The Indian economy is slowing down. GDP growth fell to 4.5% in the July to September quarter, from 7% a year ago. This is the lowest in the last 26 quarters. The economic indicators like industrial production, bank credit, electricity production and so on, are pointing to weak growth. This means lower growth in the third quarter. In such tough economic conditions, equity investors are asking an important question. How to make money in a slowdown?
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Mid-cap and small-cap stocks are known to underperform in a slowdown. Industry leaders get stronger during such times. TCS is the market leader in the IT space while L&T is the boss in the Infrastructure space.
So why mid-caps must not be avoided? Well, mid-caps are sector leaders of small sectors. They may perform even in bad times. They would also be available at reasonable valuations. (Their prices are not high). Some good small-caps too are available at reasonable valuations.
Mid-cap companies have a market capitalization between Rs 5000 to Rs 20,000 Crores. Small-cap companies have market capitalization < 5,000 Crores. If you want to invest in small and mid-cap stocks, take the mutual fund route. This is an easy way to gain exposure to the small and mid-cap segment.
If you want to beat the slowdown in the domestic sector, look at exports. The export-oriented sectors are mainly Pharma and IT Companies. These are low beta stocks. (Beta less than 1 is low beta stocks with low volatility). IT and Pharma Companies have exposure to US markets and benefit from rupee depreciation which generally happens in a slowdown.
Pharma Industry is an excellent defensive bet. This is because valuations are down in the last 3-5 years. Many Pharma Companies like Lupin Pharmaceuticals and Sun Pharmaceuticals have had their share of problems with US FDA (This is the US health regulator). This has brought valuations down, big time.
Let’s take the case of Cipla which has a strong domestic base. Even in the slowdown, people do take medicines. Domestic pharma Companies are an excellent defensive bet. Cipla has exposure to the US market along with Europe, South Africa, and the Sub Sahara region.
The NBFC fueled liquidity crisis, has given small traders nightmares. However, organized retailers have shown good revenue growth. There has been a strong focus in recent times on the organized sector with GST a big play. Many organized retail players have established business practices. This makes them safe bets in a slowdown.
The real estate sector is facing many problems and is waiting for the Government bailout. The organized and strong players in the real estate market are gaining amidst market turmoil. The aggregate housing sales value has gone up in recent times. Small-time players in the real estate space are selling businesses to the larger players.
The retail-facing banks like HDFC Bank and Kotak Mahindra Bank will do well even in a slowdown. However, the tide is turning for Corporate-facing banks. The main reasons are:
Finally, the slowdown is a great opportunity to rebuild the stock portfolio. You get shares of well-reputed Companies at low prices and this is an excellent opportunity to grab them. Bring fresh money and grab reputed names at low prices. The slowdown is an excellent time to test your risk tolerance. If the current slowdown is bringing a lot of mental stress, wait for the markets to do well and get out. Shift investments to debt and assets which give steady returns.
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