Daily Voice: Weakness in consumer spending may persist, be careful in selecting FMCG stock, advises Sharekhan's Gaurav Dua

Gaurav Dua is the Senior VP & Head - Capital Market Strategy at Sharekhan by BNP Paribas

Gaurav Dua of Sharekhan by BNP Paribas expected the weakness in consumer spending to persist. Consequently, one needs to be careful in selecting the FMCG stock and also have investment horizon of at least 12-18 months, he advised.

After more than 9 percent correction, he believes the bulk of price damage in Nifty is perhaps behind. "But the index could slip into a consolidation range for a time correction," he said.

He is positive on IT services space given the improving demand environment in USA. "The new administration is expected to revive the animal spirits in the private corporate sector of USA and further add to macro tailwinds for the IT services sector," said the Senior VP & Head - Capital Market Strategy at Sharekhan by BNP Paribas with over 23 years of experience in the equity research, asset management and investment strategy.

What is your outlook for December quarter earnings, after a detailed reading of September quarter earnings and management commentaries?

The slowdown in earnings growth persists in Q2FY25 also, post the weakness in Q1 quarterly results. Hopefully, the H2 would see improving trend on the back of renewed government expenditure. However, Nifty earnings growth is likely to moderate to mid-single digit level in FY2025 as compared to mid-double digit seen in the past few financial years. In Q3 specifically, we hope to see better commentary on resumption of government spending on infrastructure projects.

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Gaurav Dua

Senior VP, Head Capital Market Strategy & Investments|Sharekhan by BNP Paribas

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Is it the right time to bet on the FMCG sector, given its significant correction since its record highs in September?

FMCG or the discretionary consumer stocks have corrected considerably on the back of continued weakness in consumer spending in the festive season which is contrary to the rising hopes of a gradual revival in consumer demand expected by the street few months back. We expect the weakness in consumer spending to persist and consequently, one needs to be careful in selecting the FMCG stock and also have investment horizon of at least 12-18 months.

Do you think the market will not reach record highs for the rest of calendar year 2024?

It is not easy to predict market movement in the short term. We think that a pullback of 8-12 percent is seen every year in Nifty and this time it is no different. Hence, the bulk of price damage in Nifty is perhaps behind us but the index could slip into a consolidation range for a time correction. However, the pain could be extent in the broader markets with the valuations not so comfortable in certain pockets of small/microcap stocks.

What are the key risks for the market in the rest of FY25?

The risk of a global trade war driven by policies of the new administration in USA can cast a shadow on the equity markets in the coming months. In his previous term, China has let the yuan depreciate against the US Dollar to mitigate the impact of the levy of tariff by USA on Chinese imports. This has led to RBI also letting INR drift down against the USD so the Indian companies could stay competitive on the global stage. This time also it could play out in a similar fashion and accordingly the investment portfolios would have to be rejigged by asset managers.

Also, the strengthening of dollar can lead to outflows by FII from emerging markets in general and India in particular. Domestically, the weakness in consumer spending and the monetary policy to deal with changing global macros would be watched closely by the markets.

Are you concerned about the recovery in the consumption space?

Consumption is an important pillar of economic growth and consequently important for sustenance of the rally in the equity market. With limited option on the monetary and fiscal policy front given the rising global uncertainties, it is concerning to see tapering of the consumer demand lately. Hopefully, the consumer demand would revive sooner than latter if the other engines of economic growth like infra spending, real estate upcycle and private sector capex continue to fire and support the economic activity in India.

Is the worst over for the technology sector, and should one start taking exposure to it?

We are positive on IT services space given the improving demand environment in USA. The new administration is expected to revive the animal spirits in the private corporate sector of USA and further add to macro tailwinds for the IT services sector. Moreover, the possible depreciation of most of the currencies (including INR) against US Dollar would also act as an additional trigger for the Indian IT stocks.

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