Opinion

Invest in quality stocks

Janani Sri SG/Parthajit Kayal | Updated on August 26, 2020

They protect the portfolio, yield higher returns

Amidst the irrepressible Covid-19 pandemic, the stock indices have witnessed a sharp fall. Over 300 stocks in S&P BSE 500 index fell by 60-80 per cent. Frantic with such market conditions, investors hurried to park their money in gold. But even though the stock markets are volatile and liable to such sudden falls, in the long run, equities have always performed better. The CAGR of gold from 1981 to 2020 was merely 8.5 per cent, with silver at 6.9 per cent. But the NSE Nifty and BSE Sensex indices grew at around a 14 per cent CAGR, outperforming even the treasury bonds, public provident funds (PPFs), and fixed deposits (FDs) by a wide margin.

Usually, gold is considered a popular investment choice because it acts a safety net and tends to appreciate in value during market turmoil. So, people run to purchase gold as equities drop. But this protection and price gains average out in the long run due to limited movement in gold prices during normal times. On the other hand, equities have a much higher compounding effect and provide greater returns in the long run. Further, carefully selected stocks can provide gold-like safety nets and also deliver higher returns than equity indices.

These stocks have a few common characteristics among them, such as never-ending demand for their products and services; steady business management; and non-cyclicality, in the sense that such stocks are not affected to a large extent by the cycles a stock market goes through. If we look around our household, we find certain staple goods that will always be demanded for daily use — minerals (salt), toiletries and personal care items, food and even the Internet, which has upgraded from a luxury to a necessity. In the Indian markets, firms like Hindustan Unilever, ITC, and Nestle are great examples of companies that sell fast-moving consumer goods (FMCG) products. Even at the worst of worst conditions, services and goods provided by these companies will always be sought after.

Investing in such solid companies will provide higher return than that yielded by gold over the long run. It is important to note here that the aim is not multi-bagger wealth creation but to create value-protection that performs better than gold, PPFs, and FDs.

Apart from FMCGs, pharmaceutical stocks also contribute to protection. Especially at a time like now, when a new-found cure or a vaccine is the only complete solution to kick-start normalcy again, investing in pharmaceutical companies can been seen as a safe bet. Also, medicines and hospital services are basic necessities of human life; hence, we can count on these stocks being unaffected due to perennial demand for their services.

Currently, the gold prices in India are soaring. They have increased by almost 30 per cent in June alone. These price hikes make it harder for people to purchase gold assets and jewellery amid prevailing unemployment rates and falling disposable income levels. Moreover, an average person finds it easier and hassle-free to buy gold in the form of jewellery at a store of their choice than in other forms such as gold exchange traded funds, electronic gold or sovereign gold bonds. These issues further implies the need to look for quality equity stocks.

Hence, as an alternative to gold, well-analysed and researched quality equity stocks are the best bets given the risk appetite. The benefits of such an investment is double-fold — it protects the portfolio’s value against severe market movements and at the same time yields higher returns than so-called safe avenues such as gold, PPFs and FDs.

Janani is a researcher, IIM-Bangalore, and Parthajit is assistant professor, Madras School of Economics

Published on August 26, 2020

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