Fundamentals look supportive for consumer sector

Autos & Food retail look well placed, but a selective approach is needed to consumer staples.

feb-28-consumer

Macroeconomic trends in the US and Europe, in particular Trump’s policy plans, could be highly significant for the Consumer sector this year. The outlook for consumer spending is favourable and, in the US, plans for cuts in personal income tax and corporate tax could strongly benefit Consumer. Implications of possible protectionist moves are more mixed.

As the rotation to ‘value’ stocks that began in mid-2016 continues, the Autos & Components subsector is the most obviously ‘value’ sector within Consumer, and has a solid earnings outlook. We also expect reflation to be a major theme of 2017, which should benefit Food Retail in particular. Food prices (measured by Food at Home CPI) have suffered a difficult period since 2015 as prices dropped, falling into deflation in 2016. But the outlook for 2017 looks promising.

Consumer Staples have suffered heavily from the reflation trade, underperforming the MSCI World index by 15% since June 2016. Despite such a large correction, we would still be cautious about a sector call, given threats from the slowdown in emerging markets (EM), digitalisation, new retail formats and new business models.

We expect US-centric companies to outperform this year. They are especially well placed to benefit from the improving US consumer and, with a larger portion of sales and earnings in the US, will therefore benefit the most from Trump’s proposal to cut the corporate tax rate. Moreover, Trump’s protectionist stance would lead to higher operating costs for consumer companies with production bases abroad. Finally, due to their relatively high US domestic exposure, Consumer Cyclicals are the biggest beneficiary of the expected stronger USD.

Within Consumer, Autos and Components looks the best option to play the shift to ‘value’ stocks, and Food Retail is likely to be the strongest beneficiary of reflation. We think it is still too soon for a sector call on Consumer Staples, given the EM slowdown and structural challenges, but are taking a carefully selective approach focused on the concepts of self-help, optionality and valuation. We also favour a focus on US-centric companies.

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