Is it the right time to trim exposure in volatile stocks and shift to defensives?

It has always been a controversial issue over selection of stocks in the equity markets due to their distinct associated standard deviation. Equities are usually classified upon their volatility as selection of high volatile stocks expose investors to more risk while less volatile stocks keep the risk factor in check. While, the selection of high or low volatile stocks depends upon the kind of investors as aggressive investors collect stocks with higher standard deviation in order to make fortune in a short span of time but long term investors follows the Buffet’s style of wealth creation. There is a 3rd breed of advanced investors who follows the concept of diversification in stock selection to get an edge over the normal returns of equity markets and dodge the systematic risk.

One can find all these kind of investors in equity markets easily. However, a meltdown in equity markets similar to the recent nosedive due to Covid-19 pandemic give birth to those investors who invest in high volatile stocks when equity markets are knocked down by bears to ground to achieve maximum gains and show their cards when index get overbought back. While, it has been observed that the timing of liquidation of volatile stocks when markets start rising and reach to restoration levels is difficult to gauge. Most often, investors get failed to cash-in the profits that were generated by investing in the fear as high volatile stocks receive dull response when markets rise back and defensive stocks become favorites.

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Recent run-up in Indian markets since March

Right from the multi year highs of 12,430 levels to deep lows near the psychological support of 7,500, blood was heavily spilled on the Indian bourses as ‘Intensified selling’ was the word buzzing that time. Investors were heavily scared as the blood spilled over the indices was there and quality stocks were fallen to throw away prices. It says that “It’s not the heavy supply of buyers that calls for reversal but the downsizing of sellers that pulls the trigger”. The index started moving higher as investors find 7,500 levels a value bet to bank upon and let their investments run for a period of time. IT and Pharma sector became the front lead, agriculture stocks got limelight and chemical sector was crème-de-la-crème in the market. Reliance made a lot of tie-ups with foreign institutions having a vision of achieving 360-degree digital transformation of India, which pushed the Reliance share prices above Rs. 2,000. Many stocks have been more than doubled and investors with a mindset of ‘Buying the Fear’ are still sitting on pile-up of value bets despite the 50-stock bundle has touched 12,000 mark.

Time to turn defensive

It is not deniable that investors always look for an opportunity to book profits in the equity markets when index reaches an overbought position or a psychological resistance and a kiss of 12,000 less fulfills all requirements. The index has reached near the pre-Covid levels despite the vaccination for ongoing pandemic has yet not developed. Moreover, the valuations of majority stocks have turned expensive which are ticking for lighting the long positions and re-entering at lower prices. This is the high time that investors should turn back to defensive stocks in order to dodge the systematic risk as volatile stocks could dampen their returns.

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