What makes these sectors volatility-proof?

What are volatility-proof sectors and why you should include them in your investment portfolio.

The Story

We cannot avoid stock market volatility, whether it is because of geopolitical tensions or economic downturns. However, Indian stock markets have been resilient owing to robust company performance and strong domestic investments, among other factors. The past three months have been somewhat volatile, as the Nifty 50 fell nearly 10% from its all-time highs.

Though volatility is part and parcel of equity markets, a few sectors, known for their resilience to economic downturns, often emerge as a safe haven for investors. Because these sectors are less sensitive to economic downturns, investors often consider them an integral part of a portfolio providing a cushion against the fall.

Let’s look at them and understand why they are the least volatile sectors.

Volatility Proof Sectors

According to a McKinsey report – during the 2008 global financial crisis, all sectors witnessed a decline of over 20% in total returns to shareholders except for consumer staples (FMCG), which remained an exception.

As per this report, recession-resistant industries include:

• Healthcare
• Consumer staples or FMCG
• Utilities
• Telecommunication services

If we look at Indian markets, Nifty FMCG experienced a smaller drawdown than the Nifty 50 during the 2008 financial crisis. While the Nifty 50 fell ~52%, Nifty FMCG fell by only ~20% and Nifty Pharma fell by ~26%, much lower than the Nifty 50.

Further, if we look at the fall during the pandemic, the drawdown of the Nifty 50 was higher than that of the Nifty Pharma and Nifty FMCG Index.

What makes these less volatile?

FMCG (Fast-Moving Consumer Goods) companies focus on everyday essential products like packaged foods, beverages, and personal care items. Similarly, healthcare products are not just essential but are also non-negotiable.

On the other hand, utility companies (such as power and energy), and telecom providers are crucial services and have more or less consistent cash flows even during the economic crisis.

Demand for such products remains relatively stable and predictable, making them enduring performers. This is evident in risk metrics as well.

FMCG and Pharma have the lowest standard deviation among various sectoral indices.

Standard Deviation

It is a measure of an investment’s volatility, showing how much returns can deviate from the average. A low standard deviation indicates less fluctuation.

To Conclude

The condition of the stock market will always be volatile, but certain sectors like consumer, utilities, health care, and telecoms have always been able to weather the storm.

Their essential nature and steady demand make them sturdy options during rough patches. Investors seeking stability amid uncertain markets can find prospects in these volatility-proof sectors.