Consumer staples sector overview
Consumer staples companies, typically viewed as a safe haven during periods of market volatility or economic downturn, may perform well if market uncertainty increases. Staples companies also have benefited in recent years from effective cost-cutting and increased geopolitical nervousness lately. On the other hand, improving global economic growth could dampen investor enthusiasm for the staples sector.
Market outlook for the consumer staples sector
Companies in the consumer staples sector generally deal with tight profit margins, but they have done a better job in our view of containing costs in recent years and the sector has attracted investor interest lately as it was the best performing group in November.
However, improving global economic growth could limit enthusiasm for the staples sector, whose traditionally steady earnings are often viewed as more attractive when economic growth is sluggish or declining. The economic outlook for the U.S. continues to be for decent growth forward looking indicators such as jobless claims continuing to look positive, remaining near historically low levels. Global growth continues to look fairly good to us, with the majority of Markit surveys of managers around the world indicating continued positive economic performance.
When market volatility picks up, as it has recently according to the VIX (a measure of volatility), the consumer staples sector is often viewed as a port in the storm. Temporary increases in domestic political and geopolitical tensions could help support the group for short periods going forward. Additionally, given continued uncertainty over the pace at which the Federal Reserve will raise short-term interest rates, having a market-weight position in the staples sector seems prudent in order to provide some stability to an investment portfolio.
Factors that may affect the consumer staples sector
Positive factors include:
- Aggressive cost-cutting: Retailers have aggressively cut costs and are attempting to create more perceived value for consumers, which could support sales.
- Increase in volatility: With the recent spike in volatility, the traditionally stable consumer staples sector may become more attractive to investors.
- Increase in merger and acquisition activity: With competition fierce, we could see an increase in M&A action, which would help to reduce capacity and potentially provide economies of scale.
- Increased geopolitical and domestic political anxiety: As geopolitical and domestic political tensions rise, investors typically become a bit more nervous, and may seek short-term shelter in the staples sector.
Negative factors for the consumer staples sector include:
- Increased competition: Competition continues to accelerate due to the growth of low-cost emerging market production. This could shrink pricing power in the sector by compressing margins and squeezing earnings.
- Accommodative monetary policy: Numerous central banks, with the notable exception of the Fed, are firmly in easing mode in an effort to stimulate the economy, which could hurt more-defensive sectors, like consumer staples.
- Stimulative fiscal policy: In addition to the tax reform package that passed, the current mix in Washington could implement further policies aimed at stimulating the economy, which could hurt the staples sector.
Clients can see our top-rated stocks in the consumer staples sector.
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