Consumption theme can help protect portfolio in times of global turmoil

By DK Aggarwal

From a strengthening dollar to an increasing trade war initiated by the US, sentiments have been weak, and currencies of various emerging markets, be it of China, Turkey or India, have been sliding continuously.

It would be no wrong to say emerging market are at a critical stage in terms of risk appetite, thanks to the trade disputes, a strengthening dollar, US Fed tightening, political uncertainties in some emerging economies and expected China growth slowdown.

Undoubtedly, Indian rupee has been one of the worst performing currencies among its peers this year.

The domestic currency is down 10.5 per cent so far this year in the backdrop of the country’s swelling fiscal deficit, surging crude prices and mounting worries surrounding the US-China trade conflicts. Also, the recent crisis around the Turkish currency has cast a shadow over emerging markets.

However, the fall in the Indian currency was due to strong dollar demand amid growing concerns over widening trade deficit. Yes, the government has been continuously taking bold moves to revive the economy and this has helped improve productivity and laid the foundation for sustainable growth.

Given the favourable global economic growth projections, it is expected that India will see sustainable growth. To note, the Indian economy is projected to grow at 7.2 per cent in 2018-19. However, one cannot deny the fact that global factors have been creating havoc, especially the trade war and a strengthening dollar.

Also a volatile commodity market is continuously affecting the confidence of investors, along with forex markets. Crude oil prices have increased nearly 20 per cent this year amid escalating trade tensions between the US and China amid looming sanctions on Iran, which will curtail oil flow from the country.

Volatility in crude oil prices and emerging market currencies had played a spoilsport for emerging economies.

Given the volatility and uncertainty over trade wars, volatile oil prices, rising interest rates in the US, weakening currencies and forthcoming general elections, it would be safe to focus on the domestic consumption theme for now.

The consumption sector has been consistently delivering on the earnings growth front. All numbers reflecting consumption demand, from air traffic to consumer durables and automobile sales, are showing impressive growth. With the growth drivers for the consumption theme already visible, it will be relatively less risky to invest in times of uncertainties (arising from global factors).

Also, the volume growth numbers shown by various consumption-oriented companies in recent quarterly earnings have been remarkable.

Meanwhile, India with its 1.3 billion plus population enjoys a demographic advantage with over 50 per cent population in the working age. Going forward, it is expected that consumption sectors such as FMCG, auto, healthcare and consumer durables to name a few, will continue to provide upside as we expect the government focus more on the rural segment in an election year. Long-term investors always reap the benefits of such bonanza.

The consumption theme offers a plethora of wealth creation opportunities with a two- to three-year investment perspective. So, it is advised to invest more than 60 per cent of your portfolio in the consumption theme and rest in other opportunities outside this theme.