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Is it time to move away from defensive stocks to high beta ones?


Is it time to move away from defensive stocks to high beta?
As risk aversion wanes, investors are taking a fresh look at high beta counters, shunning defensive stocks like ITC and Hindustan Unilever (HUL), in favour of the metal, realty and infrastructure stocks.

The markets on Wednesday, saw consistent selling in Hindustan Unilever and ITC, two defensive FMCG stocks which saw declines in their share prices. In fact, HUL declined almost 1%, while ITC almost 0.5%, even though the markets ended higher.


On the other hand the metal pack, which comprises high beta names saw sharp increase as a penchant for risk has re-emerged. On Wednesday Sterlite Industries jumped almost 5%, while Hindalco has risen over 8% in the last four trading sessions. HDIL another high beta name from the real estate sector jumped almost 3% on Wednesday. Similarly, DLF has jumped almost 10% in four trading sessions.

The real estate, metals and infrastructure stocks generally comprise stocks that are high beta, while FMCG, pharma and IT stocks are generally the defensives.

When markets are buoyant, investors tend to sell the defensive stocks, as these stocks move slower in comparison to high beta stocks, which rise much faster, enabling investors to make more money.
However, during a bearish phase the trend is reversed as investors buy defensive stocks as these do not collapse along with the market, like the high beta ones.

Is it time to buy high beta stocks?

If global events turn favourable, especially quantitative easing in the US and further monetary easing in Europe, high beta counters may give you phenomenal returns. Already it seems likely that there would be some form of easing in Europe or the US, which has led investors to take fresh positions in the high beta names. It's likely that the upward momentum in real estate, metal and infrastructure stocks will continue, especially also since they have been languishing for too long. In fact, some stocks are fundamentally attractive and are available at cheap valuations. For example, Hindalco is trading below one times its book value and at a price to earnings multiple of around 7 times its 2012 EPS. On the other hand the defensive stocks like ITC and HUL are trading at very rich valuations.


It may just be the right time to look at high beta counters.

Read more about: hul itc
Story first published: Thursday, July 5, 2012, 9:17 [IST]
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