The recent fall in the stock prices of one of the most stable sectors in the last few years – FMCG – may trigger a dilemma in some of you: if you are holding it, should you buy more? Or if you are not holding it, is it a good time to buy now?
This question is equally applicable to the banking sector as well; given that the sector witnessed a steep fall thus far in 2013. While we will deal with the banking space separately, here’s what we think investors should be doing with their FMCG funds.
FMCG – Too Hot?
If you hold FMCG funds, you may have seen some turbulence in them over the past week or so. While the stock markets in general are reeling under pressure, this time around, you may have to sit up and take notice of this sector in particular.
It is the earnings season now and some of the biggest FMCG stocks, ITC and Hindustan Unilever (HUL) belied market expectations, thus resulting in the stocks correcting a bit. Closing Monday, the FMCG indices in both the bourses had corrected about 4-5% over the past week, and FMCG focused funds fell about 3 per cent.
Why they fell: A couple of reasons can be attributed to the ongoing decline in stocks from the sector. First, as discussed earlier, earnings of companies such as HUL is seen as the lead indicator for the rest of the sector. Besides pressure on volumes, the company’s valuations turned steep especially after it announced its open offer last month. This is true of many FMCG stocks. To step back a bit, FMCG stocks did show strong earnings growth over the last few years, aided by increased government spending, especially in rural areas. Doling out pay commission packages also boosted consumption.
Now, the effect of both the above mentioned points appears to be waning, as is visible from significantly lower consumption growth (seen in the GDP numbers).
But stock markets rallied well in the past year, with a fourth of the Sensex rally driven by FMCG according to data from newspapers. Hence stocks in the sector had moved to steep valuations last year, suggesting that earnings growth would be a challenge.
Yet, lower commodity prices (on inputs) provided some comfort in terms of propping up earnings growth till March. Besides, high buy-out prices (at a good premium to market price) offered by promoters to increase their stakes in companies such as HUL and Glaxo SmithKline Consumer resulted in valuations moving to levels that were not easy for earnings to replicate.
The second reason for the sector’s gloom stems from the sector holding the best stocks to book profits, when markets correct.
The single digit earnings growth of Indian companies has meant that valuations in the near term at least, look steep. Evidently, when the markets correct, the stocks that delivered the most and have therefore gone above comfort levels, are the ones to be sold. Whether it is the food players or tobacco and breweries stocks, every one of them delivered double digit compounded returns in the last 2 years and seemed ripe for profit taking. Hence, they were targeted.
Among funds, 25-28% annual returns in the last 3 years is a reflection of the performance of stocks in the space.
Now with markets taking cognizance of these factors and not willing to pay more for ‘defensive/safety bets’, it may be time for you as well to book some profits. Here’s what you can do:
- If you hold FMCG or allied funds (Lifestyle, Buy India, Gen Next themes and their likes), then it may be time to book some profits. This way, you will also rebalance your portfolio. Consider bringing the sector fund to not more than 10-15% of your portfolio and shift any excess to diversified equity funds/debt funds based on your original asset allocation.
- If you are a recent investor and think this is a good time to average, then be cautious. Stocks in this space have hardly corrected. And this time around, there are concerns on fundamentals. Yes, it is true that FMCG is a more secular sector as consumer goods will always see demand. But the question is how much and how fast they can grow at a time when demand slacks. Volume growth, if still possible, would come at the cost of profit margins. Hence, while the sector may make for good diversification in one’s portfolio, betting on it by adding more through the fund route may not be a good idea now.
- Yes, there would always be opportunities in the space. But at this point, seeking opportunities is best done through stock-specific bets. This is because an FMCG fund would have to own a reasonably diversified portfolio, with at least a few key stocks from the index receiving heavy weight. Owning these expensive stocks may not benefit you when you hunt for value. If you are a stock picker, then consider the direct equities route, if you must own.
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Nice article Vidya!
I would also like your opinion on the pharma sector.
Given the gloomy situation, is pharma sector a safe bet?
Hello Santosh, valuations are not that steep in the sector and the rupee depreciation also works in is favour. So while no sector is a safe bet in today’s economy, it is not in bubble territory. thanks
Thanks Vidya!
I think FMCG stocks always command higher valuations. Spurt in valuations over last 1 year is due to investors shifting to safe haven stocks aka FMCG. Also, MNCs have increased stake in their Indian arms, giving it a further boost. It is as if the entire sector is rerated and thus the comparison with historical valuations may give a false impression that they are overvalued.
Few more things to consider:
(1) Good monsoon this year will benefit FMCG companies due to good rural demand.
(2) Even during 2008 crisis, FMCG stocks stood firm.
(3) Most of them are debt free and hence insulated from current turmoil in debt market.
Happy investing!
Regards,
Hello Shirish, Thank you for taking time out to share your views here.
Yes, it is true that FMCG has never been a cheap sector simply because it has traditionally been cash rich and debt free and provides stable eanrigns and cash flow. And this is precisely why it was preferred in the aftermath of the 2008 fall, when safety of debt free companies were preferred. But valuations of the sector at an average 40 times PE may not be sustainable. the question to ask is whether this kind of earnings growth will be delivered in the next 3 years…it may be very tough.
Also, we had a good monsoon year in 2012-13. That did not do much to revive consumption spending in the country. In fact private final consumption expenditure growth nearly halved.
Whiel FMCG as a sector is a reasonably secular one, given the nature of business and less cyclicality, it has had lack lustre years as well. This was the case vbetween 2003-07, when they underperformed diversified fund category average (you may wish to see the article: https://blog.fundsindia.com/blog/mutual-funds/should-you-have-sector-funds-in-your-portfolio/2301 )
Thanks.
Dear Vidya,
I started an SIP in FMCG fund barely 9 months. What should I do now? I have SIP’s in other diversified equity mutual funds as well.
Rgds
hello ajith, As long as you have a long time frame of 3-5 years and use FMCG only as a diversifier (less than 10%) in your portfolio, you can continue. Thanks.
A perfect article, i am a huge Fan of Sector Funds, and needed a solid analysis like yours.
Thanks a lot mam.
Looking forward for your Banking Sector Funds article.
Regards,
Sunil.
A perfect article, i am a huge Fan of Sector Funds, and needed a solid analysis like yours.
Thanks a lot mam.
Looking forward for your Banking Sector Funds article.
Regards,
Sunil.
madam,
you have done a good job while high lighting the various factors as far as the fmcg sector is concerned.thanks.can one have sip in the sector at this stage?
Hello Sir, If you are having a long-term view (at least 3-5 years) and hope to keep your exposure to about 10% of total holding, you may have SIPs. Thanks, Vidya
Ms.Vidya Bala,
This article is at the right time. Thats why fundsindia.com is always best.
Hello Mr Francis, thanks. I also hope you get to use our platform services 😉 tks, Vidya
madam,
you have done a good job while high lighting the various factors as far as the fmcg sector is concerned.thanks.can one have sip in the sector at this stage?
Hello Sir, If you are having a long-term view (at least 3-5 years) and hope to keep your exposure to about 10% of total holding, you may have SIPs. Thanks, Vidya
Ms.Vidya Bala,
This article is at the right time. Thats why fundsindia.com is always best.
Hello Mr Francis, thanks. I also hope you get to use our platform services 😉 tks, Vidya
Hi,
Please advice, is it right time to invest in Gold ETF funds as correction is happening?
I am looking for returns in time horizon of 3 – 5 years?
hello Santhi, if you are looking at using gold as a diversifier in your portfolio, you may do so with a 5-year view. But exposure should be limited to 10-15% of one’s portfolio and should be made through a 2-3 year SIP. We do not advocate gold as an active investment option, unless one is saving it for specific purpose such as children’s marriage etc. thanks
Hi,
Please advice, is it right time to invest in Gold ETF funds as correction is happening?
I am looking for returns in time horizon of 3 – 5 years?
hello Santhi, if you are looking at using gold as a diversifier in your portfolio, you may do so with a 5-year view. But exposure should be limited to 10-15% of one’s portfolio and should be made through a 2-3 year SIP. We do not advocate gold as an active investment option, unless one is saving it for specific purpose such as children’s marriage etc. thanks
Hello Vidya,
Thanks for the in-depth analysis. Can you let us know your thoughts on whether this is a good time to start investing in the FMCG sector through mutual funds, if one is ready to hold on for around 2 yrs?
Regards,
Souvik
hello sir,
FMCG funds too have had their periods of under performance. And since, this appears just about the beginning, a 2-year time frame looks uncertain at this point. Hence we will advocate investment in staggered manner only if you intend to hold the sector as a defensive bet for a long-term portfolio of 5 years plus alongside other diversified funds.Thanks
PL LET ME KNOW FUTURE POSITION OF BANKING SECTOR FUNDS AND BANKING PSU EQUTIES TO BUY HOLD SELL SINCE BANK INDEX RELATIVELY COME DOWN.
S V SETTY HOSPET KARNATAKA 583201
hello sir, do follow our blog for views on banking sector. I will not be able to provide any view on direct equities specifically. banking PSU equities look risky at this point in time unless you can pick the best of the lot. tks, Vidya
Hello Vidya,
Thanks for the in-depth analysis. Can you let us know your thoughts on whether this is a good time to start investing in the FMCG sector through mutual funds, if one is ready to hold on for around 2 yrs?
Regards,
Souvik
hello sir,
FMCG funds too have had their periods of under performance. And since, this appears just about the beginning, a 2-year time frame looks uncertain at this point. Hence we will advocate investment in staggered manner only if you intend to hold the sector as a defensive bet for a long-term portfolio of 5 years plus alongside other diversified funds.Thanks
PL LET ME KNOW FUTURE POSITION OF BANKING SECTOR FUNDS AND BANKING PSU EQUTIES TO BUY HOLD SELL SINCE BANK INDEX RELATIVELY COME DOWN.
S V SETTY HOSPET KARNATAKA 583201
hello sir, do follow our blog for views on banking sector. I will not be able to provide any view on direct equities specifically. banking PSU equities look risky at this point in time unless you can pick the best of the lot. tks, Vidya
Hi,
I am observing that US economy doing well and picking up.
Please advice is it good time to invest in any of below funds as they given good return in the last one year.
I am expecting returns in time period of 1 – 5 years.
FT (I) Feeder-Franklin US Opp. (G)
ICICI Pru US Bluechip Equity (G)
DSP BR US Flexible* Equity Fund (G)
Appreciate your help.
Hello Santhi,
Request you to use the ‘Ask Advisor’ feature in your FundsIndia account (when you click help tab) in future for any fund specific /portfolio queries. This will help us keep track of investor queries and respond systematically. This will be a risky time to invest in global funds given the rupee-dollar currency fluctuation. When rupee is weak you gain more, when rupee strengthens you will tend to lose. if you are willing to take that risk, FT has a relatively longer track record. Pl. keep a time frame of 3-5 years but willing to book profits if they are extraordinary in between. Also, keep exposure to about 10% of your total allocation.
Separately, the way Indian markets have fallen, you should possibly consider investing in India in a phased manner over next several months, if you have a 5-year view. Funds such as HDFC Index Sensex Plus can be good options to ride the index with a little bit of stocks outside it.
Tks
Vidya
Hi,
I am observing that US economy doing well and picking up.
Please advice is it good time to invest in any of below funds as they given good return in the last one year.
I am expecting returns in time period of 1 – 5 years.
FT (I) Feeder-Franklin US Opp. (G)
ICICI Pru US Bluechip Equity (G)
DSP BR US Flexible* Equity Fund (G)
Appreciate your help.
Hello Santhi,
Request you to use the ‘Ask Advisor’ feature in your FundsIndia account (when you click help tab) in future for any fund specific /portfolio queries. This will help us keep track of investor queries and respond systematically. This will be a risky time to invest in global funds given the rupee-dollar currency fluctuation. When rupee is weak you gain more, when rupee strengthens you will tend to lose. if you are willing to take that risk, FT has a relatively longer track record. Pl. keep a time frame of 3-5 years but willing to book profits if they are extraordinary in between. Also, keep exposure to about 10% of your total allocation.
Separately, the way Indian markets have fallen, you should possibly consider investing in India in a phased manner over next several months, if you have a 5-year view. Funds such as HDFC Index Sensex Plus can be good options to ride the index with a little bit of stocks outside it.
Tks
Vidya
Nice article Vidya!
I would also like your opinion on the pharma sector.
Given the gloomy situation, is pharma sector a safe bet?
Hello Santosh, valuations are not that steep in the sector and the rupee depreciation also works in is favour. So while no sector is a safe bet in today’s economy, it is not in bubble territory. thanks
Thanks Vidya!
Dear Vidya,
I started an SIP in FMCG fund barely 9 months. What should I do now? I have SIP’s in other diversified equity mutual funds as well.
Rgds
hello ajith, As long as you have a long time frame of 3-5 years and use FMCG only as a diversifier (less than 10%) in your portfolio, you can continue. Thanks.
I think FMCG stocks always command higher valuations. Spurt in valuations over last 1 year is due to investors shifting to safe haven stocks aka FMCG. Also, MNCs have increased stake in their Indian arms, giving it a further boost. It is as if the entire sector is rerated and thus the comparison with historical valuations may give a false impression that they are overvalued.
Few more things to consider:
(1) Good monsoon this year will benefit FMCG companies due to good rural demand.
(2) Even during 2008 crisis, FMCG stocks stood firm.
(3) Most of them are debt free and hence insulated from current turmoil in debt market.
Happy investing!
Regards,
Hello Shirish, Thank you for taking time out to share your views here.
Yes, it is true that FMCG has never been a cheap sector simply because it has traditionally been cash rich and debt free and provides stable eanrigns and cash flow. And this is precisely why it was preferred in the aftermath of the 2008 fall, when safety of debt free companies were preferred. But valuations of the sector at an average 40 times PE may not be sustainable. the question to ask is whether this kind of earnings growth will be delivered in the next 3 years…it may be very tough.
Also, we had a good monsoon year in 2012-13. That did not do much to revive consumption spending in the country. In fact private final consumption expenditure growth nearly halved.
Whiel FMCG as a sector is a reasonably secular one, given the nature of business and less cyclicality, it has had lack lustre years as well. This was the case vbetween 2003-07, when they underperformed diversified fund category average (you may wish to see the article: https://blog.fundsindia.com/blog/mutual-funds/should-you-have-sector-funds-in-your-portfolio/2301 )
Thanks.