Everything you need to know about defensive stocks

Everyone makes money during a bull market when prices for everything are going up. However, one of the marks of a good investor is whether they manage to hold their positions relatively better than their peers in a recession or economic downturn.

In this article, we’re going to explore defensive stocks – securities that are known to ‘defend’ against a bear run. These stocks don’t fall as much as other securities when going through a rough patch, and might help you retain your capital during bad times.

What are defensive stocks?

Defensive stocks represent companies that operate in sectors with relatively stable demand, regardless of the economic climate. These businesses provide essential goods and services that consumers consistently require, even during economic recessions. 

As a result, defensive stocks tend to have lower price volatility compared to cyclical stocks, whose rallies are more closely tied to economic cycles.

Some key characteristics

Defensive stocks usually tend to be:

• Companies operating in sectors that deal with ‘essential’ goods and services: These might include food, beverages, utilities, healthcare, and consumer staples.
  
• Companies with stable demand or consistent earnings: For instance, even during a recession or economic downturn, people still need to eat, use electricity, and access healthcare. These industries, hence, see more or less stable demand even during bad times (sometimes more so).
  
• Low price volatility: Defensive stocks also tend to be larger companies with more stable price movements. In technical terms, these stocks are said to have low beta, which simply means that for every one unit move in the market (either up or down), these companies move less than one unit in the same direction.
  
  This also sometimes means that defensive stocks might give you less returns on your capital over the long term, though this depends on a case-to-case basis.
  
• High-dividend paying: Defensive stocks also tend to be companies that have a long history of paying dividends to their shareholders as a source of regular income.
  

Some defensive sectors and stocks in India

Consumer Staples (FMCG)

Overview: FMCG companies offer exposure to a large and growing consumer base in India. They often have strong brand recognition, established distribution networks, and consistent dividend payouts.

Companies: Hindustan Unilever Ltd, ITC Ltd, Nestle India Ltd, Britannia Industries Ltd, Dabur India Ltd

Utilities

Overview: Utility companies provide essential services with limited competition, leading to stable cash flows and dividend income. However, their capital growth potential may be limited compared to other sectors.

Companies: National Thermal Power Corporation Ltd, Power Grid Corporation of India Ltd (Power Grid), Tata Power Company Ltd

Healthcare

Overview: Indian pharmaceutical companies benefit from growing domestic demand and a strong export market. However, they might be especially sensitive to regulatory changes and high competition due to the nature of their business.

Companies: Sun Pharmaceutical Industries Ltd, Dr. Reddy’s Laboratories Ltd, Cipla Limited, Divis Laboratories Ltd

Information Technology (IT)

Overview: While IT is a defensive sector in some aspects, a large part of the sector is dependent on global economic factors which might cause some volatility in some stocks. Defensive stocks from IT are usually well-established companies with a long history and great brand reputation.

Companies: Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd, HCL Technologies Ltd

Managing these companies in your portfolio

If you want to make your overall equity portfolio less volatile with respect to the stock market, you could consider investing in these companies. Be informed, however, that the companies mentioned above are only indicative, and that prior individual research is paramount to making smart investments.

When researching, you can focus on established companies in the aforementioned sectors with a history of consistent earnings, dividend payouts, and moderate price volatility.

The weight you allocate to these companies should depend on your risk tolerance, the state of your current portfolio, and your long term investment goals.

Frequently Asked Questions