How A Global Recession Could Impact Indian Stocks. Five Companies To Watch

India won't be immune to a global recession. Indian investors are well aware of this and are looking for recession proof stocks.

How A Global Recession Could Impact Indian Stocks. Five Companies To Watch

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What is the most discussed topic in the financial world today?

If you answered ‘recession', you would be correct.

In the case of the Indian stock market, the term would be ‘global recession'. This is because it's unlikely that the Indian economy would have to face a recession. India is growing fast and long-term investing is likely to produce excellent results.

However, India won't be immune to a global recession. Indian investors are well aware of this and are looking for recession proof stocks.

It makes sense to take the threat of a global recession seriously. After all, foreign investors are selling Indian stocks as well as stocks in all other emerging markets for this very reason.

In fact, the fear of a global recession can take on a life of its own. Fearful investors might sell their stocks in anticipation, well before the actual recession hits.

Economists are of the opinion that a recession could occur in 2023. This is more likely if the US Fed's interest rate hikes stifle demand too much from individuals and businesses.

Others are even more pessimistic with Elon Musk stating that he believes we are already in a recession, and it will most likely get worse over the next 18 months.

At Equitymaster, we believe you should not get too influenced by these predictions. If a global recession hits, we will see a stock market crash. But that's not a bad thing. The crash will bring down prices of the best stocks to reasonable levels.

In other words, a global recession will be a great time to buy stocks.

So which stocks should you have on your watchlist?

Well, here are five fundamentally strong picks. Do keep track of their stock prices. You can consider buying them in the global recession when everyone else is selling.

  1. TCS

Yes, the first stock on our list is good old TCS, the biggest IT firm in Asia.

It's on our list because it's certain to make it out of a global recession with its fundamentals intact.

If you were to look at the company's stable historical operating margins, you will realise just how well it has handled recessions in the past.

Then, there is it's zero debt status and the massive amount of cash it generates from operations (Rs 400 bn in FY22).

The more you study the company's financials, the greater the assurance you will feel as an investor.

Its latest quarterly results may not have been great but there is no doubt that TCS will not only survive a global recession but is likely to come out stronger.

  1. Asian Paints

Why is Asian paints on this list?

Well the answer is in crude oil prices.

The rise in crude prices will lead to rise in input costs for the company as crude oil and its derivatives form a large part of its raw material costs. This in turn has the potential to impact the company's margins.

While the group has the flexibility and pricing power to pass on the rise in input prices in the domestic decorative business, this is limited in the industrial paints segment.

The profitability in the segment is susceptible to volatility in raw material prices such as titanium dioxide and crude-based derivatives, that comprise a majority of the total raw material cost.

However, in a global recession, crude oil prices are likely to crash. This will be a huge positive for the company.

Not only will it help to preserve its margins, but it will also help the company in the upcoming pricing war with Grasim which has announced a huge expansion plan in the industry.

Asian Paints share price is falling but in a recession, it should be close to the top of your buy list.

  1. Tata Motors

Tata Motors has a cyclical business model. This is true of it's commercial vehicle business and it's also true of its Jaguar Land Rover (JLR) business.

In a recession, business activity slows down. This reduces demand for commercial vehicles, although government spending on infrastructure can soften the blow to an extent.

JLR will also struggle as discretionary consumption will fall significantly in a global recession.

So why is it on this list?

Well, that's because a recession is the best time to buy this stock. In 2008, almost everyone thought the company would go bankrupt. Not only did it prove the market wrong but it also created massive wealth for the bulls.

We are likely to see a repeat of this in the event of another 2008-like situation.

Tata Motors is share price is falling but make no mistake, it will be a great stock to buy in a global recession.

  1. HUL

This one is a no brainer. If you are invested in the stock market during a recession, you must have a rock solid stock from a ‘defensive' sector in your portfolio.

And HUL is the logical choice. The company caters to the Indian market. Thus, its revenue will not be affected by global events.

In fact, if commodity prices fall, as they tend to do in recessions, the company's margins will likely improve.

Also, HUL has a long history of rewarding shareholders with dividends and buybacks. In a global recession, it's likely the company may become quite generous in this regard.

The stock is a must have during a recession.

  1. High Quality Smallcaps

Okay, this isn't a stock but a category of stocks. But the logic of including it in this list is sound.

In a recession, stock markets tend to enter a bear market. By that we mean, the benchmark indices – Sensex and Nifty – will fall more than 20%.

In this scenario, midcaps and especially smallcaps, will fall a lot more.

When fear grips the minds of investors, they tend to dump all their stocks, even the good ones. This affects smallcaps the most because they are widely held by retail investors who get spooked in a big market crash.

These stocks are also dumped because the market knows there is less liquidity in them compared to largecaps. Thus, no one wants to get stuck holding them. This only makes the fall worse for smallcaps.

And herein lies a great opportunity.

In a bear market, all smallcaps tend to be treated the same, no matter their fundamentals. All get sold indiscriminately.

This bring down the price of fundamentally strong smallcaps to mouth-watering levels. In a bear market, it's common to find smallcaps with great long-term potential, trading below book value and single digit PE ratios.

Grab these stocks without hesitation.

Well, there you go. If the world enters a recession, you will get these opportunities in the Indian stock market.

We believe you should make use it to get rich. Are you prepared?

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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