With the US economy in the doldrums, these government bonds aren't as attractive as they used to be. China has already said they want to diversify away from them, though nobody thinks there will be a wholesale dumping of US bonds.

The US government will be stepping up its issuance of bonds to pay for the growing bailouts. But it is clear that the US can't expect these countries to continue buying treasury bonds like they have been.

If the US wants these countries to buy treasuries it needs to offer high interest on these bonds. Or the Fed could step in and start buying bonds. Either or both outcomes point to a further debasing of the US dollar and will pave the way for the next inflationary storm.

With the global economy into severe recession impacting export related sectors along with foreign players pulling out of emerging markets, domestic players should go for defensive sectors like pharma and FMCG.

“Though foreign investors are not going to come back to emerging markets in near term but given the unattractiveness of the US treasuries and overall bleak economic outlook, they will stay invested but in defensive stocks, as these stocks are particularly reliant on local consumption. Hence, it is advisable for market players to pick defensive stocks from pharma and FMCG," said G Ramchandra, chief analyst at Spark Advisory.

According to a recent FICCI report, the Indian FMCG sector is poised to deliver 16% growth to Rs 95,150 crore in FY2009 aided by modest volume and higher value growth.

“We remain bullish on overall prospects of the Indian FMCG sector. We prefer stocks which are better placed to combat the economic slowdown and sustain margins," said Rajesh Ansaria, fundamental analyst at Krug and Bordman.

“While down-trading and softening of volume growth cannot be ruled out, our interaction with most FMCG companies indicates strong confidence and focus on sustaining volume growth. Among the heavyweights, we prefer Nestle over HUL and ITC owing to its premium-urban centric portfolio and strong growth performance. Among mid-caps, we prefer GSK Consumer and Marico," Ansaria added.

In the last one year the pharma sector has outperformed the Sensex even though stocks in the space witnessed significant battering. This has improved the risk-reward equation for the investors.

Till date both sectors have outperformed the indices. Sensex has fallen about 52 per cent while FMCG sector has slipped only about 10 per cent and pharma around 20 per cent.

“Segment-wise, we continue to favour CRAMS. This space is expected to witness secular growth and provide the players immense opportunity on account of the challenges being faced by innovators and cost reduction benefits. We maintain a Buy on Ranbaxy, DRL, Cadila Healthcare
, Piramal Healthcare, Orchid Chemicals, Wockhardt, Alembic and Indoco Remedies.”

source: Economictimes

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