Is market seeing handover from safety to risk?

FMCG is a safe asset which will protect you in a correction or in a fall but it is not going to be your big upside in a recovery story, says Sunil Subramaniam, MD & CEO, Sundaram Mutual.

Could this rally in infrastructure, home improvement linked sectors get stalled if the global markets were to correct further?Not necessarily because you are talking about improvement in the economic numbers versus the global market related numbers. The two are disconnected. The foreigners’ money has been largely deployed in safety, definitely not in riskier themes like cement. So I do not think there is a correlation between the fund flow and the performance of these sectors. It is the domestic fund managers who will be the greater buyers in the small and mid broader market and they are still not fully coming in and buying with full vigour.

In the financial year to date, mutual funds have sold about Rs 32000 crore of shares whereas FIIs have bought Rs 90,000 crore worth. All the FII buying has been concentrated in large and larger polarised midcaps. So money is going out from FIIs whenever a risk-off scenario is going to affect that which they bought. Mutual funds have been silently buying a little bit on the small and midcap space but by and large they are sitting on cash waiting for the economic print. So, I do not think the FII pull out is going to affect core Indian economy sectors like cement, building materials and all of that. It is just waiting for the announcements like reforms in FDI.

If there is going to be some feeling that either the government or foreign private sector is going to drive up the infrastructure sector, then cement will show the reflection of the future order books. Domestic capacity creation will take some time because we are sitting on a fairly lower capacity utilisation and that will have to fill up once domestic manufacturers start building capacity.

What is the prospect of FMCG as a story which is always aligned to valuations?
Priced to perfection is true of FMCG because the money flow into FMCG started off from a safety angle. They are less resistant to a recession or a fall and so money consistently was flowing into FMCG right through the correction. Post April recovery, FMCG was the key recipient of the money because of the safety element.

In an uncertain environment, they felt FMCG would hold up but it is already priced in a potential economic recovery. I expect the consumer durable pack to lead the next round of monetary liquidity flow into it. That is where Diwali and the harvest season will uptick. FMCG is a safe asset which will protect you in a correction or in a fall but it is not going to be your big upside in a recovery story.

So I think that is classically what FMCG is displaying. As there are green shoots of recovery in the Indian economy, people would allocate money out of the safer consumer pack into the riskier consumer packs i.e. from FMCG into consumer discretionary, durables and auto. That is the handover that is happening.

So while a steep correction need not be there in FMCG, definitely incremental money flow will move preferentially into the premium consumer rather than the low-end retail consumer.

That is what this market will reflect and to that extent, the portfolio should carry a safety element. You should stay with FMCG but your growth is not going to come from the FMCG stock prices because the market has already expected those to happen.