Basic Materials
- Despite significant and lasting commodity price decline, the materials sector is not yet an investment opportunity.
- We argue that the following changes need to take place first:
- Chinese demand for raw material needs to restart (but we doubt that the demand will return to previous levels as the Chinese economy is changing its model too),
- Production capacities need to be reduced,
- Need to see a slowdown in M&A activities to fix some of the issues (R&D, EPS, and ROI).
Consumer Cyclical
- The supply/demand imbalance is expected to last until the beginning of 2017. Thus, this will result in lower consumer confidence and more volatile consumer behaviour.
- About 30% of luxury related sales are made by consumers in Asia, particularly those in China. While the present market weakness offers excellent long-term opportunities, the short-term opportunity resembles a highly unwanted territory.
- In general, the consumer market has changed a lot in recent years (e-commerce) and the reality is that most enterprises have not yet adjusted their business models. This results in sector specific headwinds which should last for several years. This, coupled with a different climate in most DM countries, should mean it’s an opportune time to truly consider reviewing this sector.
Consumer Defensive
- The defensive consumer sector is presently overvalued by around 2% because of some much loved mega-caps.
- The recent events (e.g. broad based weakness in the BRIC states) should be considered a cyclical event and not a major long-term change for the sector.
- Consumer Staples with strong brands and key store locations should be less exposed to sector headwinds.
- European based Consumer Staples appear to be starting to rebound after years of adjustment to lower levels.
- With organic growth opportunities highly limited and cost-cutting almost fully explored, we expect that the next avenue for the sector is increased M&A activity, which bodes well most of the time for investors.