Here’s how to defend your portfolio from losses in bad times

Today, I bring to you the sector which works as an insurance and assurance to your portfolio. The FMCG segment, a defensive play, is often neglected by investors during good times, not realizing that this is the sector that stays resilient during turbulent times.

The sector had recently been affected by the high inflation the economy faced and the investors were sceptical about the growth of the companies. The soaring input costs ultimately caused the margins to come under pressure and the volume growth to slow down due to the price hikes taken.

To battle inflation, the FMCG players resorted to two ways for margin sustenance. Price hikes and reduction in grammage, which means the company will sell a lesser quantity for the same price.

The firms were facing a double whammy of value and volume de-growth. While both the above methods preserve the value, it has affected the volume growth.

Disinflation has given an opportunity for companies to pause their price hikes, which will support sales. This coupled with cheaper raw materials has normalised the margins, which will aid the players to give out better deals and sustain volume growth.

Furthermore, rural demand, which is a key growth factor, remained negative during the previous quarters. Green shoots have started to spike, indicating a revival of demand. Q4FY23 saw the companies report not only revenue growth but also volume growth and the management of the companies expect the trend to pick up.

Therefore, we can say the tides are changing in favour of FMCG companies. The above measures along with the cost optimisation steps taken during the bad time have helped the firms control margins. These cost-control measures are going to stay on the roll and the decreasing raw material prices are further set to strengthen the margins.

If we have a look at the valuations, a lot of FMCG companies are currently trading at their 5-year average PE. This makes the sector more appealing. The sector index Nifty FMCG recently touched record highs, which displays optimism among investors. However, an investor should be watchful of the company’s growth and strategies adopted by the management to expand the product mix and market share instead of getting carried away with optimism.

Technical Outlook

ET CONTRIBUTORS

The benchmark has continued its upward momentum post the bullish pole flag pattern breakout on the weekly chart. Prices just shown a single candle retracement and trend resumption candle signal the bulls are in control of the momentum and this may prolong towards higher levels.

Nifty started the week with a bullish candle, and buying momentum with muted pace for the most part of the week has been witnessed. It eventually closed higher by 1.36% or 256 points at 18,315 levels. The weekly strength indicator RSI and momentum oscillator Stochastic have both turned positive and are sustaining above their respective reference lines.

Overall, it is an optimistic month so far as Nifty bulls are enjoying a rally from their lower levels of 17,600. Prices have shown a strong breakout from the prior resistance zones and gained close to 4% in just three weeks.

Having moved above the hurdle, and the overall positive chart pattern indicates the next upside for Nifty between 18,500 - 18,600 levels in the May expiry. Immediate support is at 18,000 levels. On the flip side if the 18,000 level is getting breached then 17,850 will be the level to watch out for.