Popular Euro brands are a gateway to the emerging world

Kathleen Brooks
THE consumer staples sector is usually considered fairly robust. The types of goods it produces – alcohol, food and household products –?tend to be immune to fluctuations in earnings and during periods of economic uncertainty should continue to perform relatively well.

But that was not the case during the second quarter. While 71 per cent of companies listed on the Eurostoxx 600 index reported revenue that beat analyst forecasts in the second quarter, the consumer staples sector actually disappointed.

Of the 25 European large-cap consumer staple companies that have reported second quarter sales figures, 75 per cent disappointed Deutsche Bank’s organic sales forecasts, the bank wrote in a note released to clients yesterday. Carlsberg and Britvic were two of only six companies that reported sales slightly above the bank’s forecasts.

This is unusual. As Deutsche Bank analysts note: “Over most time periods you can think of, consumer staples companies have produced returns which have been a lot better than those of the overall equity market. The second quarter reporting period has therefore been an unusual one for the sector.”

The results were geographically diverse, with sales in Europe or the US generally stalling or contracting, whereas growth in emerging markets was strong. Even so, this hasn’t helped the share price. As you can see in the chart below, the consumer staples sector has significantly lagged the European DJ Stoxx index.

The outlook should pick up for the sector due to the massive opportunity to boost sales even further in emerging markets as middle class incomes continue to grow. But does the sector offer a good opportunity for contracts for difference (CFD) traders?

Emering markets can be elusive
As analysts at Deutsche Bank point out, getting exposure to the holy grail of emerging market consumers isn’t simple.

It’s about volumes of sales not profit growth, they say. They argue that high levels of inflation in the emerging world – while temporarily boosting pricing power – will actually have a long-term negative effect on some companies. This is because high inflation eventually leads to weak currencies. Only firms that can sell their products to the emerging world in suffiently large volumes will be able to negate some of these effects.

So CFD traders should stick to the largest companies that have strong marketing power and a well-known range of products and brands. Deutsche Bank favours Nestle, Unilever, British American Tobacco and Imperial Tobacco. Evolution Securities, the investment bank, also favours Unilever, which it believes is good value – its current price-to-earnings ratio is 12.7 times earnings: “We see Unilever’s scale, distribution reach and history in emerging markets as a significant long-term competitive advantage. There are headwinds in the second half of this year, but we remain confident that Unilever will navigate these successfully,” its analysts wrote in a note to clients.

One opportunity is Diageo, the owner of Guinness, Baileys and Smirnoff Vodka who releases its full-year results on Thursday. The attraction of a long position in Diageo is its dividend growth. Evolution expects the company to increase it by 7 per cent on Thursday, to 38.6p, which is above its 5 per cent long-term growth rate. There is also room for an investment spree – Diageo’s free-cash-flow – a measure of how much cash is readily available on a company’s balance sheet – is forecast to rise to £1.56bn this year and £2bn next year, which, if invested wisely, could boost sales in the coming years.

Overall then, if you want to get exposure to fast-growing emerging markets, then consider a well-placed investment in consumer staples.