Consumer Staples Market Outlook

Consumer Staples is a classic defensive sector that did its job protecting portfolios during 2020 and the same applies now during the Russian/Ukrainian crisis. The sector is attractive given the relative appeal of the more defensive and larger-cap stocks within the sector. On balance, we think the macroeconomic impact on the Consumer Staples sector is neutral relative to the other sectors.

Europe: Robust growth and rising yields are relative headwinds for this defensive sector. As of now, the sector is dealing at forward P/E of over 20, which indicates, when compared with historic valuations, that it is expensive. More importantly, forward EPS guidance’s and earnings revisions continue below market average.  

USA: The sector tends to underperform in a recovery as profits rebound faster in cyclical sectors. We expect that profit growth within the sector will likely lag the overall market starting in the second half of this year. 

Positives for the sector:

• It typically has a stable earnings profile.
• Companies have engaged in aggressive cost-cutting.
• During periods of strong economic growth, Consumer Staples can leverage strong pricing power (as of now: positive in the USA, negative in Europe)

 Negatives for the sector:

• Historically, an improving economy and strong stock market have typically made this defensive sector relatively less attractive to investors.
• Companies tend to have limited pricing power in a low-inflation environment.
• Higher input prices will translate into prices increases for consumers. Can they absorb with a limited wage increase?

Risks for the sector:

• Additional government stimuli and successful distribution of COVID-19 vaccines could further support the economy and reduce stay-at-home food and staples demand.
• A rise in interest rates, combined with stronger-than-expected economic growth, could result in underperformance.
• Inflation pressure is limiting a broad-based upside swing of the sector. 

 

Investment opportunities:

The sector has been one of the best performers since equities began to plummet after the February 19 peak. Demand should remain relatively resilient for products that satisfy everyday needs, despite disruption to the economy. However, other sectors of the market appear better positioned if markets begin to bottom.   Given the overall competitive outlook for the sector, investors should seek companies with strong balance sheets, low financing costs, and a strong focus on products and services. Because of high absolute valuation and limited upside potential, high yield dividend stocks are at risk; companies to consider include AD, ABI, BAT, NESN, EL, MO, and PM.