Defensive To Remain In Limelight

With the Sensex recovering nearly 50 per cent from its March lows it is becoming a risky proposition for investors and traders to bet on high beta stocks. Low beta stocks could do the trick in the current market situation. Defensive stocks once again may lead the market rally as the craze for the financials and high beta stocks fizzles out slowly. Yogesh Supekar and Geyatee Deshpande explain why it makes sense to park extra monies in defensive stocks while the DSIJ Research Team churns out the best contenders in the defensive space to beat the markets

- Yogesh Supekar and Geyatee Deshpande

Sensex and Nifty, key benchmark indices that are the barometer of the health of the Indian equity markets, have risen almost 46 per cent each since their March 23, 2020 lows. Such a sudden and record-breaking rise, though financially satisfying, has got experts worried – the single biggest concern being ‘valuations’. The valuations are way too far-stretched to not predict a market correction. If we simply look at the PE levels for 2020 in all the months, we get a fair idea.

If we look at the above table, we see that the PE has expanded steadily since the correction in March. One might say that the PE has been the highest in August at 30.38 for 2020. That may not seem very informative per se but when we realise that the Nifty PE has never been so high ever, it can be an alarming piece of information for both traders and investors. Even in 2008, when the markets were pumped up by liquidity and frenzied leveraged buying, the PE for Nifty in January 2008 was 25.33. The correction pushed the PE for Nifty towards 12.73 in January 2009 and eventually when the markets recovered, the PE clawed back to the 25.33 levels by October 2010.

Thus, we saw the PE contract by almost 50 per cent following which it expanded from the lows by nearly 100 per cent. In 2020, in spite of the voracious fall, the PE contracted from 27.96 to 20.38, indicating a 30 per cent contraction. In the wake of a recovery, Nifty is eventually trading at the 30.38 level, indicating a 50 per cent expansion in PE since April 2020. Needless to say, the current price recovery in markets is without the support of recovery in earnings and hence the valuations could be unsustainable in the near term.