FMCG sector's defensive cloak feels tear of forces in stock market

The sector's stocks fail to shield portfolios in current market selloff

The fast-moving consumer goods (FMCG) sector is losing its status as a defensive sector. Historically, FMCG stocks have outperformed in a falling market, providing downside protection to portfolios. However, during the current market selloff, the FMCG index has underperformed the broader market. The National Stock Exchange (NSE) Nifty FMCG Index is down 13.6 per cent since the end of September, when the equity market peaked, compared to a 8.7 per cent decline in the benchmark NSE Nifty 50 during the same period.

 

The FMCG sector has continued to lag for the second consecutive month in November. The sectoral index is down 4.3 per cent month-to-date, compared to a 2.7 per cent decline in the Nifty 50. On Tuesday, the FMCG index dropped by 1.6 per cent, closing at Rs 56,902.6, while the Nifty 50 declined by 1.07 per cent on the same day.

 

However, the FMCG index was an out-performer on Wednesday and closed with losses of 0.45 per cent compared to 1.36 per cent decline in Nifty 50 during the day. In comparison, the Nifty FMCG index had dropped by 1.6 per cent on Tuesday compared to 1.07 per cent decline in the Nifty on the same day.

 

The current selloff in FMCG stocks has caused the sector to lag even on a longer-term basis. The Nifty FMCG index is up 236 per cent since January 2014, compared to a 287 per cent rally in the Nifty 50 during the same period. In contrast, the FMCG index doubled between January 2011 and January 2014, while the Nifty 50 rose by just 10.6 per cent. The Nifty FMCG index was launched in January 2011. 

 

However, the FMCG sector outperformed the broader market in the 2022 and 2023 calendar years. FMCG companies are typically seen as defensive due to their debt-free balance sheets, relatively low capital intensity, and lower vulnerability to economic slowdowns, which leads to less revenue and profit contraction during recessions.

 

Analysts suggest this link has been broken due to weak consumer demand, leading to a sharp decline in FMCG companies’ earnings in the second quarter (Q2) of 2024-25. “Most FMCG companies have reported a slowdown in revenue growth and a contraction in margins and profits in Q2 due to the combined effect of high food inflation, rising commodity prices, and a slowdown in consumer demand,” says Chokkalingam G, founder and chief executive officer of Equinomics Research. He expects the pain in the sector to last for at least another quarter, after which there should be a gradual improvement in growth and earnings, driven by a moderation in food inflation and a likely decline in crude oil prices in the international market. Others attribute the bigger-than-expected decline in FMCG stock prices to market misalignment with expectations.

 

“Before the start of Q2 earnings season, there was hope for a revival in consumer demand after a poor performance by FMCG companies in recent quarters. However, the Q2 results revealed that the drag on consumer demand has been greater than expected, leading to a selloff in stocks most affected by the slowdown,” says Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equities.

 

He does not foresee a quick turnaround in consumer demand due to factors such as high inflation, a slowdown in government spending, and poor income growth. However, he expects leading FMCG stocks to begin outperforming the broader market in due course.

 

“The quarterly results of companies in sectors such as cement and metals hint at an even broader slowdown in investment demand in the forthcoming quarters. This will make FMCG companies relatively attractive to investors due to their debt-free balance sheets and limited downside in essential consumption compared to investment demand,” he adds.