5 Industries that seasoned investors should refrain from investing in the near future

This article highlights the 5 industries that even seasoned investors should refrain from investing in the near future and reasons as to why it is so.

Dec 22, 2020 08:12 IST India Infoline News Service

One of the first, and arguably most important investment tips any seasoned investor will give you is that you should diversify your investment portfolio, i.e., ensure that you don’t put all your eggs in one basket.
 
However, while this might be sound advice, one must also be cautious of the baskets they choose to put their eggs in. In other words, while diversifying your investment portfolio is a healthy investment practice, there are some industries that even seasoned investors should avoid investing in in the near future. There are a number of reasons why, and not all of them are issues that have arisen due to the pandemic. Here, we will discuss 5 such industries that you should probably reconsider investing in.
 
Residential construction
 
While the decline in the price of property under normal circumstances would be a good investment opportunity, this decline in price is not being met by demand as individuals face shortage in incomes, delaying their intended purchase. This means that even if you were to invest in property, you are unlikely to be able to sell your property and realize gains in a reasonable time-frame.
 
Real Estate companies also saw significant declines in value over the year, though the bigger players are better placed to weather the storm. There are signs of recovery as construction resumes and NRI’s show greater interest in investing in Indian Real Estate on the back of a depreciating Rupee. However, investing in the sector is still risky given that there is still a great deal of uncertainty around a strong recovery.
 
Oil and Gas
 
As sustainability and climate sensitive investing gains popularity, the price of Renewable Energy continues to decline, and the government supports its commitments under the Paris Agreement, the demand for Oil and Gas is going to continue to decrease, casting the sector’s long-term growth prospects under a degree of suspicion. Markets have also now developed alternatives to oil and gas that are both eco-friendlier and in infinite supply as they are synthetically produced. Whilst ONG shares are gaining on the back of a recovering demand for oil, it is unlikely that this sector will be able to deliver value in the short and long-run.

Automobile
 
The Nifty Automobile Index continues to fall, as recovery prospects remain slow. The automobile sector in India has been struggling since last year, and with the COVID -19 pandemic, and a global and national reduction in travel, disposable incomes and increase in aversion to seeking loans for large luxury expenditure, the automobile sector dropped significantly over the course of the year, with some respite coming in August.
 
The sector has a number of stand-out companies, that are safe bets in the long-run, but given the current situation, automobile investments should be put on the back-burn and re-valuated in the first quarter of next year and the sector’s recovery and performance prospects become clearer. In addition, with companies needing to increasingly meet new sustainability regulations and having to innovate to meet changing consumer preferences, the sector is also poised for disruption.

Travel - Airlines
 
It is no surprise that the travel industry has been hit hardest by the COVID-19 pandemic.
 
Over 31 airline companies filed for bankruptcy as a result of the pandemic, as others struggle to stay afloat. Investments in the stocks of airline companies have a long way to go before one could attain their initial investment, let alone turn a profit.
 
The increased number of regulations also have negative impacts on airline profit. For instance, airlines are required to leave empty seats between passengers. This immediately cripples the economy class for airlines that function on razor thin margins and benefit from economies of scale.
 
Having to provide PPE kits, gloves and masks to both crew and customers, alongside the cost of having to routinely sanitize the airplanes also further reduces their profit margin. As a result, airlines companies are likely to function on a break even or loss-making basis, causing their stock prices to further decline as they begin burning cash.

Banking
 
The Banking and NBFC sectors remain risky investments for the time being and are yet to recover from the impact of COVID. The 6-month moratorium for debt ended in August, but with the economy still struggling, and the shuttering of business and loss of income continuing, it is likely that Banks will continue to feel a squeeze due to the rise of delinquencies and NPAs. Furthermore, even the restructuring of debt will result in major disruptions for the sector’s regular cash flows that would increase risk for investors.
 
However, the Nifty Bank Index is slowly climbing its way back to December 2019 levels, implying investor confidence, especially given that the Supreme Court has denied the extension of moratorium. It is best to avoid the sector in the near future and assess investments in the same closer to the mid-way next year.
 
Conclusion
 
The COVID-19 pandemic has changed the face of the investment market, as sectors previously thought to be secure investments have gone belly up. In this volatile market, even seasoned investors should be weary of the markets they choose to invest in, and the above are some that could potentially be avoided.

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