Which sectors to invest in?

The markets have been volatile. One day they are up, and the next day they fall. The consistent uptrend in the Sensex seen a few months ago has not been there in the recent weeks. This has eroded huge amounts of investor wealth. Also, it has taken a toll on the confidence of the small investors. Many of the recent IPOs are again trading at below offer prices.

All said and done, there are some sectors, which look good from an investment perspective. The recent reduction in excise duty on several sectors/products will boost consumption. The sectors which look good include infrastructure, education , metals, healthcare, hotels, auto and pharma. Long-term investment decisions need not be a knee-jerk reaction to the market movements. The investment approach should be proactive rather than reactive. Investors can wait for markets to stabilise before investing.

Pharma

This will be a sector to look out for. It is already a beaten down sector and there is no reason for further downfalls in this sector. Recently, there has been a cut in the customs duty on life-saving drugs from 10 to five percent. This would reduce the cost of drugs. Lower duties might spur an increased off-take of formulations , which is a positive for the pharma sector as a whole.

Excise duty on all drug formulations has been reduced to eight percent, from an earlier 16 percent. Companies that have no presence in excise-exempt zones and had to shell out excise duty will now have some relief on this expense. Smaller players as well as domestic units of multinational companies will benefit from this.

A cut in excise duty reduces healthcare costs rather than the tax outgo of medical equipment/accessory companies. On certain specified life-saving drugs and on the bulk drugs used for the manufacture of such drugs, the customs duty has been reduced from 10 percent to five percent. This will help MNCs which are key importers of such drugs.

Power

Another sector to watch out for is power. The demand for power is increasing and the supply is limited. There is a huge potential for the good power sector companies . In the budget, the Finance Minister had announced a 'Transmission and Distribution Reform Fund' and setting up of a coal regulator. The general project import duty has been reduced from 7.5 to five percent . The creation of the T&D Fund and development measures for the secondary debt market, which will make long-term debt available for the power sector, will be huge during the 11th Plan.

Auto and FMCG

Auto and FMCG companies are also good options. The excise cut for packaging materials has been a positive for certain food processing players in the FMCG sector. The budget had reduced excise for packaging for food processors by half to eight percent.

The domestic auto industry got a major boost in the budget with the Finance Minister announcing a four percentage point reduction in excise duty on two-wheelers , three-wheelers , passenger cars, buses and chassis to 12 percent from 16 percent.

The Government reduced excise duty on two-wheelers to help the segment revive after witnessing months of declining sales due to high interest rates. The Government also extended a similar reduction in the excise duty of small cars to make India a hub for small cars.

Choosing sectors

With the retail sector booming, many companies have tapped the markets recently and are available at good discounts. One can include these stocks in the portfolio. For trading purposes, investors should buy stocks of specific sectors since not all sectors are performing optimally. There are some laggards and some sectors will outperform the market. Buying into corrections of stocks that are currently in an uptrend should be a preferred strategy. And there will be some good opportunities to short stocks that are in a confirmed downtrend.

Stocks in the auto sector provide a very good trading opportunity on the long side. Frontline construction and infrastructure companies also seem to offer a good scope for appreciation.