The Big Market Pivot: From capex to consumption - who wins now?

The NSE Consumption, Nifty FMCG, and Nifty Consumer Durables indices were among the top gainers in trade today.

The biggest trade that played out in the markets post-pandemic was the “value” trade, where all stocks belonging to investment-driven sectors performed exceptionally well. After a lost decade in capex growth till 2020, the government decided to boost public spending to mobilize the economy post-pandemic. This fuelled a massive rally in infrastructure stocks—across roads, railways, defense, shipping, power, capital goods, and construction—driven by strong earnings growth.

However, this trade came into question in June 2024, after the General Election results threw up a coalition government. The market interpreted this as a shift that could divert the government’s attention toward more populist measures and welfarism rather than the investment/capex-driven growth model that the Modi government is believed to have championed.

It was not too apparent in the June 2024 budget, but following the significant slowdown in capex spending during the year coupled with overvaluation in these stocks took the sheen off these stocks nevertheless.

The markets were expecting a reversal of the significant slowdown in capex spending over the past year, which was largely attributed to election-induced delays. The capex budget for FY26 is a 10.1% increase over the FY25R number, and tracks the nominal GDP number. This is disappointing, especially given the continued lack of significant private capex.

However, the budget has taken a route that many would describe as “very unlike” the Modi government’s philosophy. The tax breaks in this budget are a definitive acknowledgment that middle-class purchasing power has eroded in recent years due to rising taxes and higher inflation, leading to a slowdown in consumption.

Household debt is at an all-time high in India, and weak private investment spending is unlikely to be resolved unless companies gain confidence in domestic demand. This is the issue the budget aims to address.

Currently, corporate capacity utilization levels are a tad over 70%, so there is no immediate urgency for businesses to ramp up investments, given the visible demand slowdown across sectors.

Additionally, as the world becomes increasingly protectionist, companies may not have the luxury of expanding capacities purely based on export demand. It’s hard to tell if the tax reliefs will reignite demand to the degree corporates are induced to invest given both global uncertainties and the local job situation which remains precarious, and the budget dis not touch upon really.

Also Read | Budget 2025 presents fresh investment opportunities in consumer discretionary plays, says Prashant Khemka

What this means for markets

In today’s trade, all consumer companies were in the green, with the FMCG sector leading the way with over 4% gains following the budget announcement. By the end of the session, the Realty index took the top spot with 3.38% gains, followed by NSE Consumption (3.14%), Nifty FMCG (3.01%), Nifty Consumer Durables (2.96%), Nifty Media (2.21%), and Nifty Auto (1.91%).

On the flip side, the worst-performing sectors were Nifty PSE (-3.06%), Nifty Energy (-2.13%), and Nifty PSU Bank (-1.49%). Other sectors were sandwiched in between.

Clearly, the market has given its verdict—the budget benefits consumer-sector stocks more than investment-driven stocks. But markets typically move past the budget by the end of the trading session. The real question is whether this shift in government priorities can trigger a sustained rally in consumer stocks while pushing investment-driven stocks further downward, especially since many of these have already seen quite some correction.

Road, railways, defense, and several core-sector stocks—particularly in the mid- and small-cap space—have declined by over 30% since their peak last year. A meaningful recovery seems unlikely, as the flow of positive news may pause. Meanwhile, for consumer stocks, the street’s verdict is that demand could see an uptick. However, it’s unclear how consumers will deploy their tax savings—will they buy more soaps and shampoos, order more pizzas at home, talk more on mobile phones, travel more, or finally purchase the house or car they had put on hold?

The challenge for consumer stocks

A crucial point regarding large consumer staple companies is that they have already seen a massive rise in profit margins over the past few years. This significantly diminishes the likelihood of further margin expansion. Going forward, these companies will need substantial volume growth to drive earnings through topline expansion. The next few quarters will show us if they are seeing the bang that investors today expect.

Moreover, the evolving consumption basket presents another challenge. Even in rural India, channel checks indicate that some young women prioritise mobile talk time over sanitary napkins. This makes it even more difficult to predict which consumer stocks will benefit. Investors will need to wait and watch how spending patterns shift with the tax relief, especially since valuations in the consumer sector—barring autos and a few select stocks—remain expensive.

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A new market reality

In a nutshell, the game for markets—especially for new post-COVID investors—is becoming increasingly challenging. Astute stock-picking skills will now be crucial, as the era of simply riding thematic waves is over.

Currently, the only moderately valued sector is banking, which could be poised for reasonable returns over the medium term.

Overall, this is a nothing to lose, nothing to gain budget. But there is certainly a clear indication that the market pitch has changed decisively.

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