From capex to consumption: A strategic shift in market sentiment

In my articles published in January 2024 and June 2024, I highlighted the importance of investors exercising caution in the capital goods sector. Since then it peaked and has been on a downward trajectory for six out of the last seven months, with just one flat month in between. The rationale remains unchanged – valuations remain high, with the S&P Capital Goods Index trading at a P/E ratio of 40, well above historical averages.

The Union Budget 2025, presented for the eighth time by the Finance Minister, reflects a notable shift in the government’s economic approach. While last year’s budget increased capex allocation by 11.11%, this year’s rise is just 0.01%, indicating a clear move away from capex-driven growth

One of the most notable budgetary measures is the reduction in taxes, which, while leading to an estimated INR 1 lakh crore revenue shortfall for the government, effectively translates into higher disposable incomes for middle-class taxpayers. This shift in policy is expected to fuel consumption, creating new investment opportunities across various sectors.

Sectors Benefiting from the Consumption Boom

1. FMCG: Higher disposable incomes will drive demand for essential goods. However, investors should be mindful that valuations in the FMCG sector remain elevated, with most Nifty FMCG constituents trading at P/E multiples above their five and ten-year averages.
2. Consumer Durables & Electronics: Increased purchasing power will make high-value goods such as televisions, mobile phones, and home appliances more accessible, benefiting electronic manufacturers and consumer brands.
3. Automobiles: The auto sector, particularly two-wheelers and passenger vehicles, stands to gain significantly as consumer sentiment shifts toward viewing vehicles as necessities rather than luxuries. Enhanced liquidity will further fuel demand in this sector.
   
   
4. Real Estate: Among the three fundamental necessities – Roti, Kapda, and Makan, housing remains a key aspiration for many individuals. Low to middle-income house developers stand to gain as purchasing power rises thereby increasing housing demand. Interest rate cut will also make housing more affordable going forward.
   
   
5. Retail & Home Financing: While consumption is projected to rise, the modern consumer’s preference for deferred payments through credit will also increase. This trend is favorable for NBFCs and financial institutions specializing in retail and home financing, particularly those catering to the low-income and mid-income segments.
6. Banking & Investment Services: While a portion of the increased income will be channeled into consumption, a parallel trend will emerge in savings and investments. Many recent investors, having never experienced market downturns before, could turn towards fixed deposits, aiding deposit growth for banks. Meanwhile, investors seeking better returns will continue to participate in direct equity and SIPs, benefiting brokerage firms and AMCs.

Conclusion: Adapting to a Changing Market Landscape

The government’s strategic transition from an infrastructure-driven growth model to a consumer-led economy necessitates a realignment of investment strategies. While capital goods stocks are showing signs of fatigue, consumer-driven sectors stand to gain from the increased disposable income and credit availability.
Investors should exercise caution in sectors with stretched valuations while positioning themselves in industries poised to benefit from this structural shift. In a market that is dynamically evolving, staying ahead of trends will be key to maximizing returns.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)