The run-up seen in fast moving consumer goods (FMCG) stocks over the week has raised doubts over the conviction and durability of the stock market surge seen since the start of the month.
FMCG stocks, considered to be low-beta and safe haven bets, have outperformed the benchmark indices in the past week, signalling investors are still sceptical about market prospects and prefer to take refuge in these counters, despite their rich valuations.
The Bombay Stock Exchange (BSE) FMCG index has gained nearly seven per cent from its low at the start of this month, while the BSE benchmark, Sensex, has advanced less than six per cent. Shares of Hindustan Unilever Ltd (HUL) touched a lifetime high of Rs 445.90 on Wednesday.
“FMCG stocks doing well tells us the flight for safety is still on,” said Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services. “Such stocks do well when the market is in a bearish phase.
“The positive run in FMCG stocks indicates there isn't much confidence in the recent market surge and there is still fear among investors,” said Sandip Sabharwal, chief executive (portfolio management services), Prabhudas Lilladher.
On a year-to-date return basis, the 10-stock BSE FMCG index has delivered double the returns of key benchmark indices. While the Sensex has gained just nine per cent, the FMCG index is up 18.5 per cent so far this year. HUL has gained about 10 per cent this year, with ITC and Nestle soaring 21 per cent and 10.5 per cent, respectively.
The sharp run-up in these stocks in the past year has seen their valuations soar to record levels.
While HUL is currently trading at a price-to-earnings (PE) multiple of 35 times against its five-year average of 28.5, ITC's PE multiple is at 30.3 against its five-year average of 26 times. The Sensex valuation, meanwhile, has declined to 14.5 times against its historical average of 17.5.
A lot of brokerages, in the past few months, had advised remaining overweight on FMCG stocks.
Experts say one cannot expect significant outperformance from these stocks over the current levels due to their rich valuations, but they are unlikely to go out of favour with investors till the market undertone turns bullish.
“When the economy starts doing well and the investment activity starts getting back on track, these stocks will start underperforming,” said Sabharwal.
Historically, defensive sectors such as FMCG have moved in a direction opposite to the market. While these stocks tend to underperform when the market rallies, they tend to outperform when the market falls.
Interestingly, FMCG stocks and the markets have more or less moved in line in recent months as the global macroeconomic situation has remained fragile.