Why investors are favouring FMCG stocks after elections

One key reason behind FMCG becoming a preferred choice in today’s time was this year’s general election. It was the most expensive affair with an estimated campaign cost incurred by political parties reaching a record Rs 1.35 lakh crore. A significant share of this pie moves into the pockets of rural India.

India completed a historic this week, which had a roller-coaster effect on the share and led to volatility surging to unprecedented levels. The broader market indices and several other sectoral indices fell sharply on the day of the election results. However, one sector successfully resisted the bearish sentiment and could become an investor favourite now. Yes, that's the . It rallied by around 5% on Wednesday after gaining 1% on the previous day when the market crashed sharply.

There are several reasons for FMCG becoming a preferred choice in today’s time. This year’s general election has been the most expensive, with estimated campaign expenditures by political parties reaching a record Rs 1.35 lakh crore. A significant share of this pie moves into the pockets of .

Additionally, as per the election verdict, an alliance will come to power. Observing the less-than-expected support that received from the people of India to cross the majority mark, it could be anticipated that the focus will shift slightly more on populist measures to increase rural income, welfare schemes, subsidies, etc. This will help them garner support in upcoming state elections. This will ultimately increase income for rural Indians, followed by an increase in and revenue for FMCG companies. Moreover, expectations of better monsoons this year also provide a tailwind for the growth of the FMCG sector.

Another reason for the shift in preference to defensive like FMCG is the reallocation taking place in ’ portfolios. Since the government had a majority in the recently concluded term, were getting a premium owing to the ruling party's ability to make structural reforms and decisions swiftly. With an upcoming alliance, the government may lose its free hand over such decisions. The pace of capital expenditure and infrastructure investment might slow down. Therefore, PSU stocks witnessed a downward re-rating recently.

Until the full is declared, uncertainty about the government’s stance on various sectors will prevail. This has also caused a correction in capital goods stocks, which were trading at overvalued historic multiples. I mentioned the need to be cautious in the in one of my previous articles. Such upheavals in the market incline investors towards safety and thereby encourage them to go long on consumer goods stocks, given their low beta with the market. In one of my articles in March, I also discussed that it’s time to reduce risk by adding the FMCG sector to your portfolio.

are currently neglected by market participants and offer a good investing opportunity. If we look at the proportion of market capitalization of the Nifty to the market capitalization of the 500, we can observe that the current weightage of the FMCG Index is the lowest in the past twelve years at 6.02%, while the mean level is 7.65%. This indicates that the FMCG sector is at a support level and relatively undervalued currently. Hence, there are positive prospects for an upswing in the sector going forward.

Given the protection received from staples’ stocks in uncertain times and their strong fundamentals involving higher operating margins and return on capital employed, the stocks may experience a higher valuation multiple to be assigned by investors.

To sum up, optimistic spending expectations from the rural economy on consumer products, the reallocation happening in portfolios in favor of defensive stocks, their attractive valuation, and strong fundamentals are poised to make the FMCG sector a shining star in the time to come.

Last week was highly volatile for the domestic market. On June 4th, plummeted 5.93%, touching a low of 21,282. However, it rebounded strongly and surpassed the June 4th high and ended the week at 23,290, up 3.37%.

led the gains with an 8.60% rise, while slipped 2.04% for the week.

Nifty formed a dragonfly Doji on the weekly chart, which usually occurs after a sideways correction within a longer-term uptrend.

The index is holding above the short-term 9 and 20 DMA, as well as the 50 DMA (Daily Moving Average). The daily RSI remains steady at 59. The , a fear gauge, fell sharply from a high of 31.71 to settle at 16.88, indicating that volatility is cooling.

Nifty is expected to remain sideways with a positive bias. Support levels are at 22,500 and 22,400, while resistance levels are at 23,620 and 23,800.

Source: Stocks-Markets-Economic Times