Nifty FMCG vs Nifty Finance: Which sector has better long-term investment opportunities?

After a flat January, Indian markets have surged almost 1.5 percent in the month of February following positive global cues after an uneventful Interim Budget and RBI policy. Benchmarks are trading less than one percent away from their record highs. Furthermore, a massive decline in foreign outflows in February also kept the sentiment positive.

With the December quarter earnings almost over and elections as the next major trend, let's analyse between Nifty Finance and Nifty FMCG, which sector has better long-term investment opportunities?

Both Nifty Finance and Nifty FMCG underperformed the benchmark Nifty in the last 1 year. Nifty FMCG jumped over 16 percent while Nifty Fin gained 9.5 percent as against a 21.6 percent rise in the Nifty in the last 1 year.

However, both these indices have been in the red in 2024 YTD. Nifty FMCG has been a bigger loser, down over 6 percent while Nifty Fin fell almost 5 percent in this period. In comparison, the Nifty has been volatile but in the green, up 1.4 percent in 2024 YTD.

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Nifty FMCG has shed 3.4 percent in January and 2.85 percent in February so far, whereas, Nifty Finance lost 4.6 percent in January but is flat (down -0.3 percent) in February.

Both these indices have also not participated in the recent rally and had hit their peaks in late December or early January.

Currently, Nifty FMCG is almost 8 percent away from its record high of 57,966.70, hit on January 5, 2024. Meanwhile, it is still over 20 percent higher than its 52-week low of 44,392.05, hit on March 20, 2023.

On the other hand, Nifty Fin is over 5 percent away from its peak of 21,627.35, hit on December 28, 2023, but is still over 18 percent higher than its 52-week low of 17,261.30, hit on March 16, 2023.

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Meanwhile, in the long term, Nifty FMCG has given better returns between the two. The FMCG index has rallied over 58 percent in the last 3 years while Nifty Fin is up 17 percent and Nifty has gained 44 percent.

Constituents

Despite negative returns in 2024 YTD, 40 percent (6/15) of the constituents of the Nifty FMCG index have been in the green in 2024 YTD. Varun Beverages has gained the most almost 15 percent followed by Godrej Consumer, up 10 percent, and Tata Consumer, up 5 percent. Meanwhile, Radico Khaitan, Colgate-Palmolive and United Spirits also gained between 1.5-4 percent each in this time.

However, Emami was the top loser, down 17.6 percent in 2024 YTD followed by ITC, down 13 percent, and HUL, down 11.3 percent. Britannia, Nestle, P&G Hygiene and Marico also shed over 5 percent each. Dabur and United Breweries also fell 2.4 percent and 1.6 percent, respectively.

Meanwhile, in the Nifty Finance index, 45 percent (9/20 stocks) constituents were in the green. LIC Housing jumped the most, over 20 percent followed by HDFC AMC, Shriram Finance, SBI, and ICICI Lombard, which rose over 15 percent each.

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However, HDFC Bank was the top loser, down over 17 percent followed by IEX and Chola Finance, which fell over 10 percent each. SBI Cards, Bajaj Finserv, Muthoot Finance, Kotak Bank, HDFC Life, and Bajaj Finance also lost over 5 percent each.

Which index has a better long-term investment opportunity?

Apurva Sheth, Head of Markets Perspectives & Research, SAMCO Securities prefers Nifty FMCG over Nifty Finance.

The 10-year CAGR of Nifty FMCG and Nifty Finance indices are 12.2 percent and 16.1 percent respectively. Their drawdowns from all-time highs during the same period are 19.3 percent and 31.32 percent, respectively. If one looks purely from an absolute returns perspective then Nifty Finance ranks higher with better returns. However, when you look from a risk-adjusted basis, Nifty FMCG looks better with a higher CALMAR ratio of 0.63 compared to 0.51 of Nifty Finance. CALMAR is the average annualised returns divided by Max drawdown.

Tanvi Kanchan, Head – UAE Business & Strategy, Anand Rathi has also picked Nifty FMCG.

Nifty FMCG in the last 1 year has delivered a return of ~17.1 percent and Nifty Finance in the same period has generated 9.3 percent returns. However, looking at purely in terms of volume growth, for the next couple of months, Nifty Finance is far well placed for short-term investors. Volume growth is yet to pick up and the recent data of rural growth was under the broader expectations, even urban consumption is not up to mark. In the last quarter, the volume growth recorded was 6.4 percent on a YoY basis, which was lower than the previous quarter due to moderation in consumption. For long-term investors, as a hedge against volatile periods and as a contrarian view, FMCG can be allocated.

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Neeraj Chadawar, Head - Fundamental and Quantitative Research, Axis Securities believes both sectors are likely to outperform.

The dynamics for both sectors are different in nature; in the long run, both sectors will outperform. As far as the FMCG sector is concerned, Indian FMCG companies have been on a structural growth trajectory, with many categories still under-penetrated and underserved, and rural penetration is still underway. As Indian consumers increase their purchasing power, the propensity to buy premium and branded products will increase. Thus, the premiumisation agenda will drive the sector's overall growth. Additionally, the FMCG sector provides best-in-class return ratios (ROCE, ROE) and dividend yield, which helps protect the capital in the long run.

The BFSI sector is the backbone of the Indian economy, and it continues to be a 'star performing' economy compared to other emerging markets. We continue to believe in the long-term growth story of the Indian equity market, supported by the emerging favourable structure, as increasing Capex enables banks to improve credit growth. Moreover, after a muted performance for several years, the broader market's ROE is also improving. The bolstered balance sheet strength of corporate India and the enhanced health of the Indian banking system are additional positive factors. All these listed factors will continue the growth momentum for the BFSI sector.

On the contrary, Deepak Jasani, Head of Retail Research, HDFC Securities likes Nifty Finance over Nifty FMCG.

While the FMCG sector is due for a bounce, over a 6-12 months perspective, Nifty Finance may give higher returns than the Nifty FMCG index.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.