While the overall sentiment in the market has been negative for over a year, consumer sector stocks have done very well, with most of them trading close to their year’s high. However, recent development in the economy, including poor monsoon has prompted broking firm CLSA to raise the caution flag on the sector.
Following are the eight reasons why CLSA thinks consumer sector rally is over.
1. Several data points indicate India’s slowing consumption trend. Car, two-wheelers, same store sales growth, etc are all exhibiting a slowdown trend.
2. With nominal GDP growth now expected to slowdown from 16-17 per cent over the last three years to 13 per cent over the next couple of years, staples growth cannot remain immune to the slowdown.
3. Previous economic slowdown saw growth slowdown for staples with a lag.
4. Valuation premium compared to benchmark indices are at all time high.
5. Investor focus on cashflow and balance sheet has taken the sectoral valuation to an all-time high of high PE premium of 109 per cent as against 57 per cent as the average for the last 10 years.
6. Potential slowdown is not yet factored in, which means the sector will not prove to be defensive anymore.
7. Previous deficient monsoon conditions indicate consumer stocks tend to underperform in the deficient monsoon period.
8. Pharma sector is now the best defensive bet with rupee depreciation and some kickers from launches in the US.
