Six stocks that may help portfolios better withstand US Fed’s taper risk

MUMBAI: On Friday, US Federal Reserve Chief Jerome Powell said what most expected him to say: the trillion dollar liquidity tap of the central bank will be closed soon.

Over the past 17 months, the central bank of the world’s largest economy has pumped in trillions of dollars into the US economy that helped avoid a financial catastrophe along with the health crisis that engulfed the world in March 2020.

Fed’s $120 billion a month asset purchases, however, also fuelled a major part of the current bull market in global and Indian equities since the initial crash last year. The Nifty50 index has more than doubled since March 2020, while the broader market indices have trebled.

That said, the Fed will start reducing its bond-buying activity from this year, but will continue to maintain its accommodative stance to ensure further growth in the US economy. However, with liquidity slowly drying up in global and domestic equities in the coming months, markets could see higher volatility.

In the previous instance when the US Fed started tapering its balance sheet back in 2013, cash-rich companies were among the first to recover after the initial sell-off back. While chances of a sell-off like 2013 appear low given Monday’s positive reaction to Powell’s comments, cash-rich companies should be able to weather any storm if it were to come.

ETMarkets.com screened the Nifty500 index, the broadest index on the NSE, for three major criteria:

  • Cash flow per share, an indicator of how much cash the company generates per share, of more than Rs 50 a share.
  • Price-to-cash flow per share, an indicator of how much an investor pays for a Re. 1 of cash generated by company, of less than 20
  • Return on equity of less than 30 per cent

After applying the above filters on 378 companies for which latest annual earnings were available on AceEquity, only six have met the criteria.

The six stocks are

, BASF India, Corporation, and Pharmaceuticals, Oracle Financial Services Software and VST Industries.

Based on the data, these companies are not only rich on cash but are also deploying their capital in an efficient way offering considerable resistance to market volatility, which may ensue in the coming months due to the tapering of Fed’s bond buying.

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