Consumer confidence in the U.S. and Europe is at its highest level since the global financial crisis.
Good news for consumer stocks? Not entirely, says BlackRock’s chief equity strategist, Kate Moore.
In BlackRock’s latest Global Equity Outlook, Moore underscores the need to shop around for exposure to consumer stocks.
“Large portions of the consumer sectors are at the forefront of major battles gripping markets: disruptive technology, new entrants upending competitive norms, and changing consumer preferences. This challenges long-held conventions and underscores the need to shop around for exposure to consumer stocks.”
According to Moore, it’s been a mixed bag for consumer stocks in 2018. She writes that consumer discretionary has outpaced the MSCI All Country World Index while staples lag year to date despite a summer rally.
The outlook for the sector is “murky,” according to Moore.
“Trade tensions and imposed and threatened tariffs loom as a potential drag on global consumption,” she writes. “U.S. staples sport some of the weakest earnings revision ratios, a measure of analyst upgrades to downgrades, globally. And consumer sectors worldwide pale relative to the broad market on this front, as earnings have faced a disruption-induced deterioration.”
Moore is watching the extent to which imposed and looming tariffs may dent consumer sentiment.
Amid these crosscurrents of still steady global growth and market-related disruptions, Moore has four pieces of advice on what to look for when shopping for consumer stocks.
1. Seek exposure to emerging market growth.
Growing emerging market populations and a rising middle class set up a favorable demand scenario for developed market consumer stocks, which were historically the most liquid way to gain exposure to the burgeoning EM consumer, according to Moore.
Yet, she adds that high-growth consumer industries are attracting new entrants — many from within EM, setting up new competition.
“Preferences evolve as consumers move up the income spectrum,” she wrote. “Growth in bigger-ticket items like autos and luxury goods has been robust. We see reason to believe sales strength can continue, but acknowledge potential drag from recent EM growth and currency weakness.”
BlackRock prefers U.S. stocks over other regions overall, but would look to Europe when it comes to staples, according to Moore.
“We observe structural challenges that are less acute than in the U.S., and find stronger growth characteristics and underlying business models,” she writes. “European staples companies also get 27% of their revenue from EMs, compared to 16% for U.S. staples, FactSet data as of August 2018 show.”
2. Focus on quality in staples.
BlackRock attributes staples’ summer outperformance to investors closing their underweight positions.
While earnings revisions appear to have bottomed — which could provide support into year-end — staples are not necessarily “on sale,” according to Moore.
She writes that U.S. valuations are “only slightly” below their five-year average and at a modest premium to the broader market.
BlackRock finds most of the “cheap” stocks are cheap for a reason — namely, limited clarity on growth prospects and a lack of financial flexibility.
“We prefer a focus on quality and momentum versus fishing for value in challenged companies,” Moore writes.
3. Don’t completely break from “tradition.”
Traditional retail is not dead, Moore writes.
According to Moore, FactSet data shows that same-store sales growth has been trending above historical levels in major developed markets, and sales per square foot stand at record highs in the U.S.
“This points to opportunities in more traditional retail companies that have been beaten down as markets underappreciated the coming of age (and spending) among millennials and the overall health of the U.S. consumer,” she writes.
4. Expand your definition of defense.
Consumer staples companies historically have shown little dispersion across individual names, according to Moore. She explains that they share certain characteristics, such as high dividend yields, and have tended to move together. Lately, she adds that the gap between winners and losers in the sector has moved higher across the U.S., Europe and Japan.
“This tells us staples broadly cannot be relied upon as a defensive play, and that investors should be selective,” Moore writes. “We believe a good defense today is in quality companies demonstrating high profitability, sound balance sheets and strong brands.”
The key is targeting growth potential that can outrun inflation, she adds.
— Check out 6 Economic Predictions for Next 5 Years: Northern Trust on ThinkAdvisor.