Consumer Staples

Our <i>Cyclical Indicator Update</i> reveals that a defensive portfolio strategy remains the best bet to navigate the crosscurrents of stagnant profit/economic growth yet abundant global liquidity.

Consumer staples stocks have been on a tear recently, climbing to all-time highs. While valuations are in overshoot territory, the conditions to sustain this overshoot exist. A flurry of intra-sector M&A activity, anemic global growth and the plunge in global bond yields all argue for a premium valuation in long duration sectors. In fact, the rising stock-to-bond ratio (top panel) coupled with the firming dollar (second panel) and resurgent volatility across asset classes (bottom panel) are a boon for non-cyclical consumer equity relative performance. Earnings expectations are not demanding, particularly relative to the overall corporate sector, underscoring that defensive staples stocks are not only well insulated from overall market turbulence, but also well positioned to thrive in a deflationary/disinflationary global backdrop. Bottom Line: Stick with a defensive portfolio tilt and continue to overweight the S&P consumer staples sector. Consumer Non-Cyclical Stocks Are A Staple For Every Portfolio Consumer Non-Cyclical Stocks Are A Staple For Every Portfolio

While the economic fallout from Brexit is likely to play out over a long horizon as the U.K.'s exit is negotiated, this political event will have repercussions for U.S. equity markets in the interim. For instance, defensive sectors have surged, in relative performance terms. Since the financial crisis, consumers' propensity to save has steadily climbed. That has coincided with increased traffic at non-cyclical retail stores, to the extent that their sales have largely outpaced overall retail sales in recent years, which is unusual during an economic expansion. Policy and political uncertainty are likely to fuel this trend. Thus, the consumer staples sector should continue to enjoy an upward re-rating in relative forward earnings estimates. Both valuations and technical conditions are below previous overbought extremes, underscoring that there are few barriers to ongoing stealth outperformance. We reiterate our overweight position. The ticker symbols for the stocks in this index are: BLBG: S5CONS. bca.uses_in_2016_06_30_001_c1 bca.uses_in_2016_06_30_001_c1

The sinking global credit impulse warns that reflation has not overwhelmed deflationary forces. Financials will continue to suffer, while utilities and retail drug stores will benefit.

Economic disappointment will become the key theme in the second half of the year, driving a return to non-cyclical market leadership and a recovery in the growth vs. value ratio.

Consumer goods stocks enjoyed a spirited run at the end of 2015 and into 2016, but have largely consolidated that outperformance this year. However, the S&P packaged food (PF) index has bucked the trend, recently setting a new all-time relative performance high. Despite our preference for defensive groups, we are surprised by the resilience of the PF industry, and wary of its sustainability. To be sure, a surge in net earnings revisions suggests that analysts were behind the curve. However, positive profit revisions are not necessarily a sign of operating vitality, as they appear to be entirely driven by cost reductions rather than top-line strength: packaged food sales growth is contracting. PF ROE has deteriorated on the back of revenue contraction, diverging negatively from the relative valuation expansion. Typically, a sustained multiple increase can only occur within the context of a rising ROE, given the latter's direct impact on profit growth. Relative valuations may reflect an M&A premium rather than superior operating performance. Both the value and volume of deals accelerated aggressively in 2015. But 2016 has seen a sharp drop in the value of announced deals, warning that valuations may get squeezed unless growth prospects improve. We are underweight this group. The ticker symbols for the stocks in this index are: BLBG: S5PACK - MDLZ, KHC, GIS, CAG, TSN, K, MJN, SJM, HSY, MKC, CPB, HRL.VAR. bca.uses_in_2016_05_27_001_c1 bca.uses_in_2016_05_27_001_c1

Our recent upgrade of the S&P hypermarkets index was predicated on the view that expectations had become so depressed that upside profit margin and sales surprises were increasingly likely. Walmart's positive earnings results suggest that this thesis is starting to play out. There is tentative evidence that the industry's investments in store improvements and marketing are paying off. Hypermarket sales are rising in absolute terms, and are finally gaining ground on overall retail sales. This trend should be sustained, as lower income consumers are feeling much more confident than higher income consumers as wage inflation improves (second panel). In fact, hypermarkets could enjoy an influx of new customers given that the rising personal savings rate implies that more affluent consumers may soon 'trade down' when shopping in order to preserve capital. At the same time, costs are under control, as measured by the deflation in imported consumer goods prices and ongoing deflationary pressures from major producing countries. This is a recipe for continued upside profit surprises and we reiterate our overweight stance. The ticker symbols for the stocks in this index are: BLBG: S5HYPC - WMT, COST. bca.uses_in_2016_05_20_001_c1 bca.uses_in_2016_05_20_001_c1

We focus on 3 stress-points in the economy and markets which segue to several high conviction investment recommendations.

Beverage industry profit results have shown the negative impact of the previously strong U.S. dollar, causing some profit-taking in related shares. Nevertheless, underlying earnings fundamentals remain sound, and the currency should soon cease to be a drag. As a non-durable goods industry enjoying comparatively short sales cycles, beverages should be among the first beneficiaries of the recent depreciation in the U.S. dollar, particularly again against emerging market currencies. The chart shows that U.S. consumer goods exports have already rebounded strongly. That is corroborated by healthy shipment growth (top panel), and resurgent pricing power. These trends are consistent with decent top-line performance, which should translate into higher profits, given that labor and other input cost inflation is in decline (bottom panel). We reiterate our high-conviction overweight. The ticker symbols for the stocks in this index are: BLBG: - S5SOFTD, KO, PEP, MNST, DPS, CCE. Beverages Fall Flat Beverages Fall Flat

One of our highest-conviction investment ideas for the next few years.