Consumer staples have been the market darling for much of the last decade as investors have sought safety in a world of diminishing returns.
Put another way, the era of ultra-loose monetary policy and historically low interest rates has seen yield become more expensive forcing investors higher up the risk spectrum.
This progression has led them into equities where they have migrated towards large-cap, dependable growth stocks with reasonable dividend yields.
Known as ‘bond proxies’, many of these stocks reside in the consumer staples sector, which over the last decade has been a big winner in the UK.
Indeed, the FTSE All Share Consumer Goods sector has outperformed the wider FTSE All Share by 30.82 percentage points over the last 10 years.
Performance of indices over 3yrs
Source: FE Analytics
However, in the last few years the sector has taken a bit of a back-step as investors have contemplated the idea that interest rates may rise quicker than expected.
Aberdeen Standard’s Thomas Moore recently warned that volatility in October was the first sign of a long rotation from quality growth names such as consumer staples into value stocks.
But before you sell all of your funds with overweight positions to the sector, it is important to know that the consumer staples sector behaves very differently around the world.
Taking the US as an example, the S&P 500 has far outstripped the S&P 500 Consumer Staples sector over the past decade.
This is partly due to composition of the market, which has been dominated by high-growth technology stocks during an era when global economic growth has been fairly muted.
“If you look at the consumer staples companies in Europe it does seem as though those trade at expectations that are above and beyond the consumer staples expectations in the US,” said Comgest US portfolio manager Peter Shapiro.
While valuations are cheaper than in places like the UK and Europe, he added that this does not necessarily make them cheap.
“That said, many of the expectations for consumer staples companies in the US I still think are too high. Just because they are more reasonably priced does not mean they are more reasonable,” he said.
Below, his Comgest colleagues managing funds focused on Asia, Japan, emerging markets and global equities look at how they approach consumer staples in their asset classes.
David Raper, co-manager of the Comgest Growth Asia Pac Ex Japan fund, said that there is a similar story in his asset class to that of the US, although he is keener on the sector.
“We like consumer staples in the emerging markets,” he explained. “They are one of the first places to think about. But we have to make sure we are not being lazy about this, [especially] when companies like Unilever Indonesia trade on up to 50x earnings.”
While it is a “great business” that does deserve to be on a premium, he said valuing it at 45-50x seems excessive relative to the wider market.
However, he added that with the market falling back this year – indeed the MSCI AC Asia Pacific ex Japan index is down 11.22 per cent in sterling terms – some of the best opportunities to add have come from the sector, which has been hit harder than others due to their previously high valuations.
“Some of the opportunities that have come back down more recently have been in this space. Not Unilever but others in that space are beginning to lose a little bit of their excitement that the investor base has had,” he said.
Performance of index over YTD
Source: FE Analytics
It is a similar picture for the wider emerging markets, where consumer staples are also derating. While part of this is due to the rise of interest rates in the US making these ‘bond proxies’ less attractive, this is not the full picture.
In the emerging markets one of the major themes of the last decade has been the rise of the middle class, who, with more disposable income, have been able to afford higher quality products.
“Originally, consumer staples were a great way to invest into the growing middle class,” Emil Wolter, co-manager of the Comgest Growth Emerging Markets fund, said.
“Today after two decades of rising middle incomes the rising middle class is no longer some concept or target that we aim to arrive at in the future – it is very much a reality.
“Once you are in the middle class the proportion of your marginal income that you spend on staples is not growing as much - once you have your shampoo you don’t have to buy a lot more.”
He noted that people are now spending money on other things such as travelling, buying bigger items on the internet, looking for experiences or even wealth management and insurance.
“It is another reason why the growth level we can expect from this group of companies will perhaps not be as exciting as it was 10 years ago,” he said.
From the perspective of Japan, Comgest Growth Japan’s Richard Kaye said that while the consumer staples in the emerging markets are struggling, those in Japan are reaping the reward.
Indeed, with interests changing in Asia, many of the middle class – particularly of a younger generation – are looking at “cool” Japanese products.
“We have seen a number of Japanese consumer staples companies whose multiples have risen but not just because it is a bond proxy but because it is a great company with a changing earnings profile,” he said.
“Japanese cosmetics sell to Asian consumers. Japanese lifestyle and apparel is very interesting to Chinese and Asian consumers and as the market is starting to re-rate that opportunity a lot of these multiples have gone up.
The fund manager added: “They have gone up because they should as there is a new growth opportunity in Asia which is 7x more numerous than the Japanese consumer.”
Finally, from a global perspective, taking all of these regions into account, Laure Negiar, co-manager of the Comgest Growth World portfolio, said it is about choosing select businesses from each region.
“There have been some great businesses to buy [this year] but it hasn’t been all smooth sailing. There has been a lot of worry in that sector,” she said.
She noted that disruption to e-commerce, the potential for Amazon and other tech giants to disrupt established industries and a whole host of other factors have hurt the industry globally.
“[As such] you have had some great staples businesses we think at great entry prices throughout the year.”