What happened to the consumption theme?

Until a couple of weeks ago, the consumption theme was the favourite theme among investors and fund managers. They believed that rising interest rates, deepening trade war, higher equity market valuation and general election one year down the line will make the market volatile. In these circumstances, they believed, consumption theme will remain the structural story which investors can ride on. There were various fund houses that launched open-ended and closed-ended funds based on this theme. The performance of the Nifty FMCG index favoured them as they remained one of the best performers in the last one year.

In the last one week, however, Nifty FMCG index has fallen by 6.06%, one of the highest declines among various Nifty indices. So, does it mean that the consumption theme is over for now and you should exit from the funds?

There are a couple of reports that directly hit the edifice on which the high returns of consumption theme were built. The growth in incomes, price projections and spending projections are the key determinants of spending power of the average consumer that drive the consumption stocks. Nevertheless, the RBI’s recent Consumer Confidence Survey (CCS) found around three-fourths of the Indian households thought their income levels either decreased or remained the same. More than half of them believed their income would either remain the same or deteriorate in the next one year. What this means is that the expectations of lofty volume growth of companies may not fructify. Moreover, some of these companies are trading at very high valuations, which makes their further upside limited. Hence, these stocks are witnessing the current fall. Besides, investing in the consumption-based theme should be a tactical portfolio allocation for you and you should avoid major investment in this sector.