This is Why I'm Bullish on FMCG Stocks

The market believes that the FMCG index provides one of the best hiding places when there is a high risk of an economic slowdown.

Did I say an economic slowdown? Could there be an economic slowdown in India?

Well, we may not be as dependent on exports as say China or other Asian nations. But there's no denying that if a slowdown grips the world, there will be some tremors felt here in India as well.

And with Trump's tariffs throwing the proverbial spanner in the wheels of the global economy, a possibility of an economic slowdown is getting stronger with each passing day.

In such a scenario, it becomes important to take a long, hard look at one's portfolio and try and think about ideas on how to minimise the damage from a crash that can occur due to a slowing economy.

One of the most common suggestions is to move a significant part of one's portfolio into a defensive sector like FMCG and let it stay there till situation improves.

You see, if there is an economic slowdown, people are not going to stop taking their bath, brushing their teeth or washing clothes and utensils.

And since these activities need FMCG products, there is a steady demand for FMCG products even during an economic slowdown. This makes FMCG stocks the perfect choice during times of economic distress.

However, there is a catch here. One needs to have a first mover advantage in order to execute this trade.

The problem is everyone else is also thinking along the same lines and therefore, everyone else will also make a beeline for the FMCG trade.

This will eventually push the prices of FMCG stocks higher and hence if you are late, you may have to pay a huge premium to get into these stocks and all your advantage would be lost.

One way to find this out is to assess the valuations of FMCG companies. If they are too expensive, one is late to the FMCG party and if they are cheap or even fairly valued then one may still consider getting in.

Well, the good news is that major FMCG companies like HUL, Nestle, ITC, Dabur and Emami are all either trading below or close to their long-term PE multiples.

Hence, the risk-reward equation of investing in them is still in favour of investors if one goes by historical valuations.

This brings me to the second question. Are we seeking protection from FMCG stocks against a stock market crash or an economic slowdown?

Will the FMCG trade last a few months where, as soon as the stock market hits bottom, we will be out, or will it last much longer, till the economy goes back to its long-term growth rate?

Let us assume there is going to be a 30-40% crash in the market over the next few months. In that case, will it make sense to get into FMCG stocks? Do these stocks have a history of falling less than the broader market when stocks are crashing?

Well, I looked at both the 2008 sub-prime market crash and the 2020 Covid crash to test the resilience of FMCG stocks, and I came away impressed.

You see, the sub-prime crash started around January 2008 and went all the way till March 2009. During this time, the Sensex crashed by 60%. Yes, that's right. This is not some penny stock or a micro-cap that I am talking about.

I am talking about the blue-chip index Sensex which fell by a huge 60% during the sub-prime crisis. And by how much did the FMCG index fall? Well, it lost just 28%.

In other words, Rs 100 invested in Sensex would have dropped to Rs 40 whereas the same Rs 100 would have dropped to only Rs 72 in the FMCG index.

FMCG stocks did prove to be quite resilient during the sub-prime and was a good place to park your money during a big stock market crash.

Let us move to the Covid crash of 2020. Here, the crash lasted for all of two months. It started in January 2020 and was over by March 2020.

The Sensex lost almost 40% during these two months. And by how much did the FMCG index fall? Well, it fell by 27%, again a much lesser fall than the benchmark index.

And again, a resilient performance by the FMCG index. Hence, from the evidence at hand, it does appear that the FMCG index does provide good protection from a stock market crash.

Thus, it won't be a bad idea to move some of your portfolio into FMCG stocks or FMCG index whenever you are anticipating a big market crash.

Now, let us come to the performance of FMCG stocks during an economic slowdown. India's GDP growth faced a lot of challenges in the previous decade i.e. between 2011 and 2020.

Between 2003 and 2010, our GDP grew consistently in excess of 7% except for 2008. However, it could not touch the 7% mark in 2011, 2012 and 2013 and was one of the big reasons why Prime Minister Modi came to power.

Then again, the double jolt of demonetisation and GST hurt our GDP growth badly in 2017 and 2018.

And here's the shocker. In 2019, when the BJP Government came back with an even bigger majority, the GDP growth at 3.9% was the joint lowest since 1992.

Then of course there was the Coronavirus crisis which led to a negative GDP growth of close to 6% i.e. the GDP contracted by 6%.

Hence, it would be fair to conclude that the decade between 2010 and 2020 wasn't great from an economic growth standpoint. Can you guess which sector outperformed the benchmark index during this period?

Well, it was the FMCG index. Yes, that's right. During a decade when the Sensex was up just 2.3x, the FMCG index was up a lot more respectable 3.5x.

In fact, individual stocks did even better. Britannia was up 17x, Hindustan Unilever was up almost 8x, Marico was up 7x, Godrej Consumer up 6x and so on.

Therefore, during a decade where the Indian GDP growth slowed down and Sensex performed poorly, the FMCG index and FMCG stocks outperformed and gave good returns.

In conclusion, FMCG stocks have proved their resilience in the past, both during a stock market crash as well as during a period of economic slowdown. We are currently facing a situation where there could be both i.e. a stock market crash as well as a period of economic slowdown if the Tariff wars intensify.

Therefore, it may not be a bad idea to get some portfolio protection in the form of stocks that are resilient and can withstand these shocks.

FMCG stocks could be great candidates to play this role to satisfaction. So, think about that and give this idea a serious consideration.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)