These are turbulent times. The US Federal Reserve chairman Jerome K Powell warned the US Congress “higher and longer” interest rates & cycle in the months ahead. Over the past few days, stock markets have been in an uproar. Silicon Valley Bank, a US-based bank that funds venture capital funding, collapsed. It failed to raise the capital needed for adequacy requirement. US regulators shut it down.
In India, share prices have barely moved over the past year. It is a hard toil for those looking for returns unless you know where to look. For ordinary people, fixed deposit rates of over 7% will curb risk appetite. They would not like to dive deeper into equity returns as interest rates stay high. When interest rates are high, there is a flight towards safety.
For those interested, though, India offers a variety of businesses that could make up a defensive portfolio. Companies like Oil India, a state-owned enterprise, have witnessed a share price jump due to profit growth and high dividends payouts. Many profit-making companies tend to get beaten down in a general stock market decline. That is where the opportunity lies.
Profit-making companies pay dividends. They manage that because they generate cash flows. Their businesses are insulated from the economic downturn by making products or services people need. Companies that no longer require capital and have a cash surplus are the best bet in a situation of rising interest rates.
As an ordinary investor, it is not easy to go through companies’ balance sheets and identify them. You need to know how to read the cash flow statement, calculate free cash flow, and know about the cash conversion cycle and the dividend payout ratio. The simplest way you do that is by picking a benchmark index fund that tracks the NSE Nifty 50 or S&P BSE Sensex. Companies in these indices are market leaders in their respective sectors. Investing in such companies will give you adequate diversification against volatility in less profitable companies.
However, there is always an urge to generate the ‘alpha’. You want to pick stocks that are winners or your portfolio to do better than the market. No matter the market situation. For that purpose, you will have to look at the financials of businesses that sell products or services people buy all the time. You would notice that companies that produce household consumer products continue to enjoy valuations much higher than the market. Banking and financial services companies also tend to do better as people look for the safety of their savings. People do not stop buying medicines too. A few pharmaceutical companies make them do better too.
A lot of that knowledge is data-centric. There is a sea-change in the way we analyse financial data today. Artificial intelligence allows us to pour over voluminous data to throw up the information we need beyond conventional data. Technology & Big Data can help you identify stocks that are not based on tips or from unregulated entities. Alphagenie is a single stock recommendation engine that provides you with key decision making tools like “upside potential” and “Risk – Reward“ to help you identify the right stocks for you. Do visit www.alphaniti.com and visit the “alphagenie” section.
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