Risk rising for consumer stocks – Timing is everything
While we have been OW FMCG stocks for growth protection and due to
significant headwinds to the investment cycle, we are beginning to grow
concerned about the possibility of a bigger-than-expected consumer
slowdown. The first signs are visible – growth in discretionary
consumption has already turned weak. Weakness in non-discretionary
consumption is starting to show up in company results.
Consumers have benefitted at the expense of future growth because of
the government’s loose fiscal policy post-GFC, which has also played a
significant role in India’s CAD problem. The result has been India’s
imbalanced growth – high consumption and slower investments.
The pressures on currency, inflation and sovereign ratings have finally
forced the hand of the government. For the first time subsidy cuts are
happening before, rather than immediately after elections.
We estimate that the overall effect of hikes in fuel prices, electricity tariffs
and railway fares so far has been to the tune of USD28-30bn. We
reckon that another USD9bn impact could come through if a full catchup on diesel prices were to happen. Additional electricity tariffs could
likely cause another USD13bn burden on consumers.
A slowing investment cycle implies a significant slowdown in job
creation. This will likely hinder the ability of consumers to both spend
and trade up. Further, recent depreciation of the rupee will likely raise
prices for consumers, especially for items such as electronics etc., which
have become increasingly large in consumer outlays.
Even as investments remain weak, the added consumer slowdown
implies that overall GDP growth may continue to disappoint, in our view.
However, while the recent RBI action to stem rupee depreciation
realigned expectations of a declining rate cycle, we believe that the
slowdown in consumption and investment demand will in turn lead to a
reduction in CAD which should clear the way for a positive rate cycle
emerging over the next few quarters. We are neutral on banks.
Tactically, RBI’s moves to tighten liquidity have increased the overhang
on rate cyclicals with the implication that consumer sectors may continue
to perform till such time when the rate cycle starts to move down again.
We are turning neutral on FMCG as we think that economic conditions,
coupled with RBI’s tightening stance may extend the consumer sector’s
run for a bit longer. However, extreme sector valuations could well put
the sector in harm’s way when the consumption slowdown begins to
show up in company earnings and macro data.
Among defensives, we prefer IT services and pharma to FMCG.
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While we have been OW FMCG stocks for growth protection and due to
significant headwinds to the investment cycle, we are beginning to grow
concerned about the possibility of a bigger-than-expected consumer
slowdown. The first signs are visible – growth in discretionary
consumption has already turned weak. Weakness in non-discretionary
consumption is starting to show up in company results.
Consumers have benefitted at the expense of future growth because of
the government’s loose fiscal policy post-GFC, which has also played a
significant role in India’s CAD problem. The result has been India’s
imbalanced growth – high consumption and slower investments.
The pressures on currency, inflation and sovereign ratings have finally
forced the hand of the government. For the first time subsidy cuts are
happening before, rather than immediately after elections.
We estimate that the overall effect of hikes in fuel prices, electricity tariffs
and railway fares so far has been to the tune of USD28-30bn. We
reckon that another USD9bn impact could come through if a full catchup on diesel prices were to happen. Additional electricity tariffs could
likely cause another USD13bn burden on consumers.
A slowing investment cycle implies a significant slowdown in job
creation. This will likely hinder the ability of consumers to both spend
and trade up. Further, recent depreciation of the rupee will likely raise
prices for consumers, especially for items such as electronics etc., which
have become increasingly large in consumer outlays.
Even as investments remain weak, the added consumer slowdown
implies that overall GDP growth may continue to disappoint, in our view.
However, while the recent RBI action to stem rupee depreciation
realigned expectations of a declining rate cycle, we believe that the
slowdown in consumption and investment demand will in turn lead to a
reduction in CAD which should clear the way for a positive rate cycle
emerging over the next few quarters. We are neutral on banks.
Tactically, RBI’s moves to tighten liquidity have increased the overhang
on rate cyclicals with the implication that consumer sectors may continue
to perform till such time when the rate cycle starts to move down again.
We are turning neutral on FMCG as we think that economic conditions,
coupled with RBI’s tightening stance may extend the consumer sector’s
run for a bit longer. However, extreme sector valuations could well put
the sector in harm’s way when the consumption slowdown begins to
show up in company earnings and macro data.
Among defensives, we prefer IT services and pharma to FMCG.
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