Consumption Stocks Approach Bottom; Recovery Dependent on Growth Outlook: Morgan Stanley

Global brokerage firm Morgan Stanley believes the consumption sector might be approaching the lowest point of the ongoing market sell-off. Elevated valuations have weighed heavily on investor sentiment, causing a sharp decline in consumption staple stocks. In February alone, the Nifty FMCG index fell by 11%, reflecting the sector’s struggle amid broader market volatility.

Despite this downturn, the brokerage noted that for these stocks to experience a valuation re-rating, investors will need clear signs of growth recovery. Over the past few quarters, urban consumption has been under pressure, with demand from metro and tier-1 cities lagging behind.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Consumer Discretionary Over Staples: A Shift in Investor Preference

Compared to consumer staples, mass discretionary consumption—including quick-service restaurants and innerwear—is in a better position for recovery. Morgan Stanley favors the food & beverage sector over home and personal care segments, given their stronger demand prospects. Additionally, the paint sector is facing heightened competitive pressures, reducing the likelihood of a valuation rebound.

On the discretionary front, the brokerage continues to back market leaders, favoring companies with strong brand recognition and pricing power. Among value retailers, tier-2 market players are expected to outperform their metro and tier-1 counterparts, as demand dynamics shift towards smaller cities.

Top Stock Picks: Overweight & Underweight Ratings

Morgan Stanley’s top overweight stocks in the consumption space include:

ITC
Jubilant FoodWorks
Nykaa
Page Industries
Tata Consumer Products
Titan
Trent
Varun Beverages

Meanwhile, the brokerage remains cautious about the following underweight stocks:

Asian Paints
Berger Paints
Avenue Supermarts
Nestlé

Market Trends & Demand Outlook

Although sequential performance has improved, it remains below market expectations. Looking ahead, Morgan Stanley anticipates moderate demand trends, with companies navigating macroeconomic challenges and consumer sentiment fluctuations.

At the company level, Marico and Varun Beverages maintain a positive growth outlook, projecting double-digit expansion. However, most other firms remain cautious, as margins stay within the guided range.

Volume growth in the quarter was subdued, primarily due to weak demand, although price hikes helped improve value growth. Interestingly, rural consumption has continued to outpace urban consumption for the fourth consecutive quarter. However, the ongoing urban slowdown has largely overshadowed rural recovery, keeping the sector’s overall growth constrained.

Challenges & Growth Triggers in the Consumption Space

Despite some signs of stabilization, the consumption sector continues to face key challenges. The rising cost of raw materials, inflationary pressures, and muted consumer spending have weighed on growth. Furthermore, geopolitical uncertainties and changing consumer behavior have added layers of complexity for companies trying to sustain market share and profitability.

However, there are key triggers that could drive a potential rebound in the sector:

Festive and Wedding Season Demand – Increased spending during these periods could boost sales across discretionary and staple segments.

Government Initiatives & Rural Recovery – Policies aimed at increasing rural income and employment could enhance rural consumption, benefiting FMCG and discretionary players.

Digital & E-commerce Expansion – The growing shift toward online shopping, especially in tier-2 and tier-3 cities, is likely to support demand recovery.

New Product Launches & Innovation – Companies focusing on premiumization and value-driven innovations are better positioned to attract consumers.

Final Outlook

While valuation pressures and weak urban demand remain concerns, Morgan Stanley expects selective opportunities for recovery, especially in discretionary consumption and value retailing. Investors will likely keep a close watch on quarterly earnings, margin trends, and demand recovery signals before taking decisive bets in the sector.

As companies continue to navigate inflationary headwinds and consumer sentiment shifts, strategic positioning in high-growth segments such as food & beverages, quick-service restaurants, and innerwear could provide stronger returns in the long run.