Defensives FMCG, pharma, IT may gain as investors on backfoot after weak mandate for NDA

The Nifty FMCG index that ended almost a percent higher while all other sectoral indices languished in the red.

Fast moving consumer goods, pharmaceuticals and IT could end up becoming the indirect beneficiaries of the NDA coalition's mediocre performance in the recent elections.

Market favourites like PSUs, capital goods, realty and infra took a beating on June 4 as the market is now worried that it may be overpaying these stocks. Reason being the weaker-than-expected mandate for the NDA may prompt the government to step up its spending on welfare schemes, and this could come at the cost of reduced outlay for capex spend.

In a report, foreign brokerage Bernstein had suggested that consumption stocks might see a more favourable outcome if the opposition staged a come-back, at least in the near term.

If the BJP-led coalition does not perform favourably, there will be a quicker recovery in consumption. "Rural consumption will pick up with more money in the hands of the poor," said the brokerage.

The markets factored this in, leading to the outperformance of the Nifty FMCG index that ended almost a percent higher while all other sectoral indices languished in the red. In the case that the NDA won over 340 seats, the brokerage said that rural consumption would likely stay weak near term.

Prashant Khemka, the founder and managing director of WhiteOak Capital Management, as well as veteran investor Sushil Kedia highlighted that fund managers might shift their strategies given the current market uncertainties.

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The market will move towards sectors with more predictable earnings and growth potential. There could be potential long opportunities in sectors such as FMCG and IT, which provide a safer harbour amid market turbulence, they noted.

Sushil Kedia pointed towards the underperformance of IT and FMCG stocks relative to their potential, which according to him, made them attractive even if a strong government mandate had materialized. "With a fragile mandate now in place, these sectors become even more appealing as safe havens," Kedia said.

Rahul Arora, CEO of Nirmal Bang Institutional Equities also stated that with a target of three-months, he'd collate a portfolio between the IT, pharma and consumer sectors, going heavy on the latter two. “FMCG was one of the best-performing sectors in the latest earnings season, combined with projections of a normal monsoon, rural recovery picking pace, and easing inflation," Arora highlighted.

Taking the bullishness over defensive plays further, Emkay Institutional Equities also expects a strong return of consumption themes, revolving around FMCG and value retailers. The firm also remains constructive on the healthcare sector.

Signs of an uptick in rural recovery, easing inflation and the possibility of the coalition government shifting to a populist rather than a reformist theme are expected to aid a turnaround in FMCG stocks, which also happen to be underperformers in the recent market rally.

As for the pharma pack, its ability to display relatively stable performance during economic downturns or periods of market volatility makes it a perfect defensive bet. Moreover, the sector's optimistic outlook stems from domestic pharma players transitioning away from traditional generics towards more complex drugs. In addition, easing price erosion and drug shortages in the US combined with increased investment in research and development further bolsters investor confidence in the pharma pack.

Also Read | Sushil Kedia's election aftermath playbook: Exit financials, PSUs, enter FMCG and IT sectors

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