The only pocket of green – is the shift towards defensive for real?

In the past month, the Nifty 50 has declined by over 1 percent, while the Nifty FMCG and Nifty Pharma indices have climbed by 7 percent and 6 percent, respectively.

In a market bleeding with losses, the pharma and consumer goods sectors have stood out as bright spots. The market's reaction amid concerns over a US recession indicates that, in times of distress, investors are seeking refuge in defensive stocks.

This sentiment is also mirrored in the market’s performance over the past month. During this period, the Nifty 50 has declined by over 1 percent, while the Nifty FMCG and Nifty Pharma indices have climbed by 7 percent and 6 percent, respectively.

Even in today's session, it was only pharma and FMCG names that emerged in the list of gainers on the Nifty 50, while all other constituents struggled with losses.

While green shoots of recovery in rural demand are driving volume growth for consumer names, a foray into complex, low-competition drugs in the US and strong domestic growth are supporting sentiment for pharma majors.

Several factors point towards a promising future for consumer and pharma companies, particularly as investors seek new pockets that still offer reasonable valuations with better earnings visibility.

Positive Q1 show

Motilal Oswal Financial Services highlighted that the results for consumer companies so far have been in line with expectations, exhibiting an improving consumption trend.

"In the staples sector, demand has been steadily increasing, with indications of growth in rural markets," the firm noted. The brokerage also remains 'overweight' on consumption names.

As for the pharma sector, quarterly earnings have continued to showcase an upward trend even in the April-June quarter, with major names like Dr. Reddy's and Sun Pharma delivering better-than-expected numbers.

Improving growth prospects

Bullish sentiment for pharmaceutical companies is also driven by the significant growth potential on offer. The expected expiration of patents on drugs worth billions starting from FY27, along with a supply shortage of key drugs in the US, is fueling positive sentiment for the sector.

As for consumer names, the signs of a revival in rural demand, along with the government's push towards lifting the rural economy in the Union Budget, are seen as key growth drivers for the sector.

Underperformance in recent times

While the market has seen a stellar bull run in 2024, sailing through crucial events like the Lok Sabha elections, geopolitical crises in West Asia, and the Union Budget, sectors like FMCG and pharma had not participated much in the rally.

Consequently, while concerns of frothy valuations spread like wildfire across most pockets in the market, these two sectors have seen moderate growth in earnings along with stocks flatlining, making valuations a tad cheaper than their peaks two years ago. This is prompting investors to churn their portfolios in favour of these underperformers of the last round. Their defensive characteristics are also buoying sentiment around these stocks, amid overall nervousness.

Along the same lines, Unmesh Sharma, head of institutional equities at HDFC Securities, also believes that investors should look at fairly valued large caps and defensives like FMCG and Pharma, which can be bought once the market stabilises. He further added that at the current juncture of high instability, safe havens like consumer staples and pharma names should be considered.

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Veteran investor Sushil Kedia also sees upside potential in mid-cap pharma names, largely due to their growth prospects over the next six months. Kedia also saw potential long opportunities in sectors such as FMCG, which according to him, provide a safer harbor amid market turbulence.

Taking the point forward, Rahul Arora, CEO of Nirmal Bang Institutional Equities, also anticipates the market focus to shift towards defensive sectors like FMCG and pharma in the short term.

"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.

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