Risk-off sentiment abounds in India amid geopolitical unrest, China's revival; here's where investors could find shelter

Analysts stress that with current valuations, it’s very much a stock picker’s market.

With uncertainty hanging over the Indian equity market as it grapples with the double whammy of China’s revival stimulus and the escalating geopolitical drama in the Middle East, investors are turning risk averse. Amid these uncertain times, where the shaky global environment has investors on the edge about looming downside risks, money managers are pointing to domestically focused sectors as potential safe havens.

These sectors, due to their dependence on the strong domestic market, offer a more secure place for investors to ride out the global storm. The common sectors that have sprung up are financials, information technology, power, pharmaceuticals, and capital goods. That said,  investors need to identify pockets of growth within each sector to navigate through these rough waters.

Safe havens to sail through volatile times

According to Kranthi Bathini, Director - Equity Strategy at WealthMills Securities, while sectors like FMCG, healthcare, pharma, power, and capital goods are more insulated from the geopolitical environment, investors still need to be judicious with their entry price points.

"In a market that’s predominantly driven by stock specific plays, investors should select stocks from these sectors while considering their growth visibility over the next few quarters," Bathini advised.

Siddhartha Khemka, Head of Research at Motilal Oswal Financial Services, also gave out similar advice, to go defensive in a market that's volatile. He presented a case for banking and information technology stocks--highlighting their comfortable valuations and recent underperformance.

For banks, Khemka remains positive on an improvement in earnings, especially for private names, in the coming quarters. Similarly, he is also optimistic on IT majors, largely on account of hopes of improving demand, positive management commentaries and rate cuts in the US.

Also Read | Samir Arora on market fall: China re-balance only tactical short-term move, can’t predict geo-political risk, be ‘reactive’ to global cues

A couple of other sectors pointed out by Khemka were consumption and retail names along with telecom--all of which are focused on the domestic economy. Improving rural demand, the upcoming festive season, good monsoon are all factors that can contribute to an uptick in earnings for retail and consumption names, however, a significant spike in oil prices can still tick input costs for the latter.

Power is another attractive sector as India's peak power demand is about 220 gigawatts, with a deficit in supply, said Alok Agarwal, Head - Quant & Fund Manager, Alchemy Capital Management. Over the next 5-7 years, an additional 100 gigawatts of generation capacity is needed, indicating significant growth potential for companies involved in power transmission, he added.

Downside risks

Two major causes of worry stemming from the volatile global stage are about money flowing out of India and into China, all while bracing for a potential spike in oil prices lurking in the background.

While most market experts do not see the case for foreign investors selling Indian equities in favour of Chinese counterparts sustaining for longer, it is the potential risk of an uptick in oil prices that seems to be the bigger worry.

The real concern here is Israel potentially targeting oil installations in Iran which could cause an upswing in crude prices, wreaking havoc on oil-importing nations like India and driving the trade deficit through the roof.

In addition to spiraling India's trade deficit, a spike in crude prices could also weigh heavily on companies dependent on crude derivatives as raw materials. As a result, experts caution investors against having high exposure to oil-dependent sectors like paints, tyres, and oil marketing companies.

Another brewing concern is the potential disruption of trade routes if the Middle East crisis escalates further. Export-oriented sectors dependent on these supply chains are also sectors investors are being advised to avoid.

Also Read | China attracts $13 billion inflows in a week, India falls behind at $107 million: EPFR's Cameron Brandt

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