Defensive stocks are the stocks which perform and give you constant returns not depending on market condition.
The idea behind FMCG and Pharmacy stocks are in category of defensive stocks, the sales of these companies won’t be affected with the market performance.
Everyone would be buying food and consumer goods, medicines on daily basis irrespective of market condition.
I think IT stocks are not defensive in nature.
Pharma, IT and FMCG stocks called as 'Defensives' as these are the sector which probably will not give you a Higher percentages of return but will give you a steady return. No matter what ever the market condition or even recession this sector will not be Affected as much others.
Think about Medicine,food,clothes this are the basic requirement ,In a word these are Necessity not luxury and we cannot do without.So no matter what ever happened this sector will remain unaffected.
The best way to Identify or find a defensive stock is looking in to the BETA Value of that stocks.Defensive Stocks have a BETA value of less than 1 which mean these stock rise more slowly than the market when it is uptrend and fall more slowly then the market fall or down trend.
Defensive stocks are companies which provide important goods and services irrespective of the general economic condition and are generally stable all year round. The products and services of these companies enjoy a steady demand throughout the year and are not affected by business cycles. Therefore defensive stock sectors are FMCG Companies and Pharmaceutical companies.
IT Companies do not qualify as a defensive stock sector.
A defensive stock is a stock whose growth has low correlation to economic activities. No matter what the economic conditions are, the earnings and cash flow of the company will remain relatively stable, even the share prices will remain stable. Pharma and FMCG is known as defensives because even if the individuals revenues is going down there wont be any significant reduction in the spending for household things and medical supplies. Hence in any market condition defensive stocks tend to be stable and during recessions defensive perform better than the market because investors bet on defensives than cyclical’s because they will have consistent sales as these goods are a necessity than a luxury like cars. Its always a good ideal to have a mix of cyclical and noncyclical in your portfolio to balance out.
The beta of defensives are less than 1 which indicate that they will be less volatile than the market. Where as noncyclical will have a beta more than 1 which indicate there price will be more volatile than the market. Hence a possibly of higher return and also a higher rate of risk. The beta is calculated by regression analysis which a statatical process for finding out the relationship among variables.
Defensive stocks are those companies which are always stable and have a constant volatility through out the year.Since Pharma and FMCG are a basic necessity there is no room for them to take a turn.
Siva, in my opinon, defensive stocks are not about the returns…it is more about preventing capital erosion.
In my opinion, the defensive stock have the potential to provide consistent dividends and stable earnings regardless of the state of the overall stock market. If you look at the overall market scenario, there is a steady demand for FMCG and Pharma sector pharma and FMCG industries have been exempted from nation-wide lockdown as it came under the essential services. Due to the stable structure, defensive stocks are less volatile and also tend to protect the price and return over a period of time.
Defensive stocks may not give the kind of return that typical high beta stocks would give. The core idea behind such stocks is to protect your portfolio value during bad times.