IT, FMCG lose defensive sheen. Where should investors seek safety now?

For years, investors seeking refuge during market swings gravitated towards IT and consumer staples stocks, but that strategy is looking less reliable today as both sectors wrestle with slowing growth, rising competition and shifting investor expectations.
A sector is defensive “when earnings volatility is amongst the lowest, when the ownership of this sector is quite low, and expectations are low,” said Harish Krishnan, chief investment officer Equity, Aditya Birla Sun Life AMC. The numbers tell the story.

Over the past three years, the Nifty IT index has gone nowhere, while the Nifty FMCG index has fallen 16%. In contrast, Nifty 50 has gained 17%, according to Bloomberg data. Fund managers say these sectors no longer have the combination that once made them dependable safe havens: low expectations, limited investor ownership and steady earnings.
Bloomberg data showed that Nifty IT surged 166% in 2009 and 60% in 2021, while Nifty FMCG gained 59% in 2005 and 48.5% in 2012—returns that market participants believe may be difficult to replicate.“I agree,” says Trilok Agarwal, fund manager at Ambit Asset Management, adding that those periods were driven by exceptional circumstances rather than normal business cycles.

The 2009 and 2021 IT rallies were driven by post-crisis recovery and a digitalisation boom, but with both sectors maturing, growth is slowing amid AI disruption, stronger competition and changing consumer behaviour. FMCG companies are battling disruption from direct-to-consumer brands and quick-commerce platforms, while IT firms face uncertainty over technology spending and questions about how AI could reshape the industry.
As a result, investors looking for stability are casting a wider net. Many are now favouring businesses with predictable earnings and strong cash flows in sectors such as healthcare, telecom, utilities and financials, alongside income-generating assets such as real estate investment trusts (Reits) and infrastructure investment trusts (InvITs), Krishnan said.

The recency biasChockalingam Narayanan, head Equities–Alternates, ICICI Prudential AMC, said stock returns are driven by earnings growth, particularly volume-led growth, and P/E re-rating backed by improving return on equity (ROE). He sees opportunities in select D2C FMCG companies and mid-sized IT companies, some of which are part of the AMC’s portfolios.
Investors also tend to have a recency bias when viewing these sectors as defensive. They commanded premium valuations in 2010-2020 amid benign global interest rates and predictable earnings, but not in the 2000s or 2020s. “So, it’s eventually a cycle,” he said.

Some of these companies have expanded their margins through reinvestments that have not sustained their growth, leading to disruption and the entry of newer companies, Narayanan said. Rather, their recent underperformance raises a more consequential question: are these former market favourites turning into contrarian opportunities?
Agarwal of Ambit Asset Management would look for stabilizing client spending, faster deal conversion into revenues, positive earnings revisions and AI-led growth in IT stocks. For FMCG, he would look for sustained volume growth rather than price-led growth, better execution in quick commerce and a recovery in rural consumption.“A lower share price alone does not create a contrarian opportunity,” said Sachin Relekar, senior equity fund manager, Axis Mutual Fund.

A sector becomes attractive when expectations and valuations have reset, and earnings outlook begins to stabilise or improve, he added.“The strongest contrarian opportunity arises when market expectations remain cautious, but earnings revisions stop falling and begin to turn positive.
That is more meaningful than a stock merely trading below its historical valuation,” he said. So, where should investors look for defensiveness today? Relekar prefers picking defensive businesses over replacing IT and FMCG with another fixed list of defensive sectors.

Such characteristics can be found selectively across healthcare, utilities and financial services, he said. Relekar sees selective opportunities in pharma, financials and utilities, though regulatory and valuation risks remain.