The stock market is never devoid of opportunities. It is often said traders and astute investors make more money when the market is on a downturn than they do when the market is rising. Of course, it involves playing in derivatives, or instruments that are derived from stocks, and requires specialisation.

But direct equity, too, offers opportunities to ride opposing economic forces in downturns or to cross-hedge positions between two sectors or asset classes in order to shockproof a portfolio. This is based on the economic principle that all constituents of the financial market do not move in tandem and a crisis for one industry can work in favour of another.

For instance, when crude prices rise, we try to rush out of oil marketing companies, as they suffer more losses under the administered fuel pricing mechanism, and buy into private refiners, expecting their gross refining margins to rise.

The trick is to identify threats and the opportunities they create. A discreet analysis can throw up many such options.

If FMCG companies are seeing strong margin pressures due to high raw material pr ices, the idea should be to find the industries involved in the production and distribution of those raw materials and invest in them. No wonder, fertiliser and agro-chemical stocks have been showing strength over the past 1218 months. Since April 1, GSFC, Chambal Fertilisers and Coromendal Fertiliser have gained 28.16 per cent, 25.30 per cent and 3.88 per cent, respectively.

And when petrol and diesel prices rise, the idea should be to shift to natural gas.

Brokerages across the spectrum have been recommending investors to buy gas stocks over the past few months. “Margins are getting better as IGL has surprised with minor but regular price hikes over the past 18 months. It has increased CNG prices by 42 per cent over eight hikes to pass on the cost increases,“ Nomura India said in a note.

On Petronet, the brokerage said higher domestic production would aid more LNG consumption, which will help this stock. It also has a buy recommendation on Gail.

In the auto space, while car sales have been sliding due to high interest rates, twowheeler and tractor makers are seeing a spurt on expectations that a good monsoon would result in bumper crop and raise demand in the rural belt. Hero Honda and Bajaj Auto have risen 28.16 per cent and 5.83 per cent in this financial year so far compared with 9.38 per cent decline in the BSE auto index.

They have grown so much that market watchers now expect them to underperform others in the same sector. Kotak Institutional Equities has a buy recommendation on M&M, Maruti Suzuki and Tata Motors but reduced Bajaj Auto and Hero Honda.

In the banking space, the sluggishness over the past few months has been more due to fears that credit growth will drop and bad loan volumes will rise amid high interest rates. While the risk of a surge in bad loans is high in case of big banks, especially public sector ones, and those with huge exposure to real estate and infrastructure sectors, smaller players with lower exposure to these areas may end up with better bottom lines.

“We prefer banks with a more conservative asset quality profile, especially among the mid-caps. These include Syndicate Bank, Bank of Maharashtra and United Bank. From a medium-term perspective, we prefer large private banks with a strong structural investment case, such as Axis Bank and ICICI Bank,” Angel Broking analysts Vaibhav Agrawal, Shrinivas Bhutda and Varun Varma said in a note.

Cross-hedging strategies work wonderfully e if one can rightly spot the peak and trough of d a business cycle. Prashant Jain, CIO and t executive director of HDFC Mutual Fund, s surprised many when he said at a Mumbai c conference recently that he was looking at o infrastructure and banking sectors, stocks r most investors have been offloading of late.

Market-cap biases, too, present such opportunities. In a weak macro environment, e large-cap stocks normally outperform their e mid-cap peers as investors stick to companies , with strong balance sheets and cash flows.

But through its sluggish phase over the past e nine months, the market has seen mid-caps and large-caps move in tandem. What it means I is that large-caps could turn out to be better v wealth creators compared with the mid-caps a from here on. Conversely, they can provide a better cushion in case the correction deepens.

Brokerage Macquarie said mid-cap stocks such as Omaxe, M&M Financial Services, India Cements, GVK Power, Marico and Emami are vulnerable. “They have either outperformed the market over the past three months or have high revenue and growth forecasts over the next two years and downside risks to these estimates,” it said.

The brokerage maintains an outperform rating on Bharti Airtel (good defensive play), Tata Power (even after factoring the downside of the Mundra UMPP) and BPCL (high-quality oil find in offshore Brazil).

There can be similar strategies for protection from the collateral damage arising out of the sovereign debt crisis in Europe, the slowdown in the US or the weakening of the rupee.

While western disturba nces threaten to cut into top lines of export-oriented firms in the IT, apparels and gems & jewellery industries, the depreciation in the rupee promises to protect bottom lines to a large extent, depending upon the currency hedging positions of individual companies. Currency hedging positions are relatively higher for IT firms. Amay Hattangadi and Sridhar Sivaram, lead portfolio managers at Morgan Stanley Mutual Fund, said they are underweight on the IT sector. “In this scenario, a good cross-hedge could be to buy into domestic-focused firms,“ they said. Among the biggies, TCS has a fair share of revenue coming from domestic operations while among mid-caps, Rotla and Geodesic have good domestic exposure.

Pharma companies may have huge stakes in western markets, but a financial crisis such as the present one, is unlikely to dent their prospects much. Also, MNC stocks such as GSK Pharma, Pfizer, Novartis India and Aventis Pharma and selective Indian counters such as Cipla are largely India-focussed in terms of their business.

The quantitative easing package unveiled by the US Federal Reserve too offers investors to an option to cross-hedge. If this easy liquidity leads to a surge in commodity prices, like it had happened on the past two occasions, the strategy would be to go into commodity stocks such as Hindalco, Tata Steel and Sterlite and at the same time avoid interest rate-sensitive stocks, as any rise in commodities prices will keep the inflation rate high and delay the interest rate cycle. Gold investors, who have taken a hit over the past few weeks due to the strengthening of the US dollar, can look to ride the trend reversal as any easing of the euro zone situation or intervention by the US Fed will stem the rise of the dollar, which will send gold prices soaring again.