Defensive stocks are poised to outperform benchmark indices for the third consecutive year even though the recent reforms initiated by the government may have increased the appetite for high beta and risky stocks.
According to Bloomberg, the BSE FMCG index has given year-to-date returns of 41.02%, while BSE Healthcare and BSE Consumer Durables index have given returns of 27.56% and 33.52%, respectively, so far this calendar. The 30-share Sensex, which has gained more than 8% since the beginning of September, has given returns of 20.28% so far this calendar year.
Market experts said high volatility in equity markets, coupled with persistent uncertainty in global economic environment and Indian government’s reluctance in going through reforms, forced investors to rush to defensive stocks, such as FMCG and pharmaceuticals.
?The outperformance has been on account of continued delivery on the operational front from companies across the (FMCG) sector as well as a risk-off environment, where defensive sectors have been the flavour with investors. This is also reflected in the performance of other defensive sectors, such as pharmaceuticals, which has also had a strong run,? said Manish Jain, analyst, Nomura Financial Advisory & Securities.
On the other hand, pharmaceutical companies benefited on the back of continued revenue momentum in the US (as a result of sharp depreciation in the rupee against the dollar), new product launches and a resurgent domestic Indian market, experts said. Meanwhile, 2011 saw BSE FMCG index (+9.53%), BSE Healthcare index (-12.83%) and BSE Consumer Durables (-16.87%) outperform Sensex, which gave negative returns of 24.64%.
What experts found most interesting about the recent growth in FMCG companies was the fact that several companies continued to expand their rural distribution reach and convert indirect sales to direct sales despite concerns of poor monsoon. ?The impact of the poor monsoon would only be nominal on consumer staple stocks, and would be visible only in the third quarter. We do not expect demand to moderate to a large extend, however, a rise in raw-material prices may hurt margins,? said Mihir Shah, analyst, Daiwa Capital Markets in his research note. In full-year 2010, FMCG stocks (31.97%), healthcare (34.19%) and consumer durables (67.93%) yet again outperformed Sensex, which gave modest returns of 17.43%.
However, experts say this trend could change next year as the reforms outlined by the government offer a promising path to improving growth outcomes for the economy, which would prompt investors to move back to cyclical and high beta stocks like banking, real estate, infrastructure, among others. As a result, many brokerages have gradually started to go ‘neutral’ from ‘outperform’.