The Nifty Bank index, which tracks banking stocks, has been the weakest performer so far this year, posting a modest rise of just 9%. Following closely behind is the Nifty FMCG index, which managed a 13% gain, while the Nifty Metal index saw a relatively better performance with an increase of around 16.7%.
Despite the gains, all three sectors lagged behind the overall market rally this year. The Benchmark Nifty, in comparison, clocked gains of 17% on a year-to-date basis.
Banking: Pressure on margins weigh
The banking sector, which has been grappling with pressure on margins, is also facing a double whammy of deposit growth pressure and competition from NBFCs.
Within the banking pack, IDFC Bank and Bandhan Bank were the laggards, falling 18% and 12%, respectively this year. Meanwhile, sector leaders ICICI Bank and SBI topped the returns chart.According to Atul Parakh, CEO of Bigul, “Banks have also been contending with deposit growth challenges, making it harder to defend margins in an environment where global interest rates are peaking.””Private banks have underperformed their public sector counterparts due to less favorable valuations. PSBs were available at better relative valuations entering 2024,” said Vaibhav Shah, Fund Manager at Torus Oro PMS.
Shah further explained that investors gravitated towards PSBs, expecting them to benefit from the economy’s gradual credit uptick.
While there are concerns about further margin compression, there is cautious optimism. As central banks embark on rate-cutting cycles, private banks might find some breathing room.
Parakh suggests that improving asset quality, thanks to prudent risk management during the pandemic recovery phase, could act as a tailwind for the sector.
Metals buckle under global concerns
The metals sector, which is highly linked to global growth, has been among the worst performers in 2024. “Metals have borne the brunt of global recession fears, particularly from major economies like China and Europe,” Shah said.
Among the metals pack, APL Apollo (-6%) and NMDC (1%) hurt the most, while Vedanta (73%), Hindustan Zinc (52%) and Nalco (40%) were pretty rewarding to investors.
FMCG: Struggling with margin compression and rural demand slowdown
FMCG, traditionally a defensive sector, too had to endure the pain of margin compression in addition to slowdown in rural demand, which was the case for quite a few quarters now.
Rising input costs, driven by commodity price inflation, have squeezed profit margins across the board. Many companies have been forced to raise prices to offset higher costs, but this has led to reduced consumer demand, particularly in rural areas.
“The rural slowdown has been a significant drag for the FMCG sector. High inflation in these areas has cut into consumer spending power, further exacerbating the sector’s underperformance.” Parakh noted.
Do these three sectors still hold value?
While 2024 has not been rewarding for banking, metals, and FMCG sectors, their future may hold promise, particularly for investors with a medium-term view.
“Despite underperformance, these sectors may offer value for short-term allocation. Banks could benefit from potential interest rate cuts and improving asset quality. Metal stocks might rebound on infrastructure push and global economic recovery. FMCG could see improved rural demand and margin expansion as input costs stabilize,” said Parakh
Analysts are bullish on the consumer sector, especially discretionary names, adding that two-wheeler original equipment manufacturers (OEMs) could also benefit as rural demand improves.
Within FMCG, Dabur India and Patanjali Foods stand out as companies poised for recovery, according to Parakh. “Investors can also examine opportunities like Aadhar Housing Finance, Aptus Value Housing Finance India, Axis Bank in banking and NBFC, Lloyds Metals & Energy in metals,” he said.
(With data inputs from Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
