Consumer
Our Sector
The European Consumer Staples and Retail Sector, as we define it, includes 56 stocks within the STOXX Europe 600. Key themes include consumer spending growth, innovation and specific category growth rates, raw material and logistical cost inflation, brand strength and the ability to price, currency translational and transactional costs, online v physical location, as well as regulation and litigation.
Market update
Since 2012 the Consumer Discretionary sector has significantly outperformed the bench index, whilst Consumer Defensives have significantly underperformed. To a large degree the performance of the Consumer Discretionary sector is a reflection of the sustained recovery and success of the Luxury sub-segment post the 2008-9 financial crisis and the 2009-12 Euro crisis, driven by rising demand in Asia.
The Consumer Defensive sector historically held a significant PE premium to the market average, based upon its perceived consistent organic sales and profits growth, and above average cash returns. Within the sector there was strong outperformance from those segments benefitting from the rising wealth effect in Asia – notably Beverages and the HPC segments – offset by a significant de-rating of the Tobacco segment post 2017. However consumer defensives have significantly underperformed and de-rated over 2023-24. In part this is due to a combination of lack of volume growth combined with much weaker pricing post the input-led inflation of 2022-23, but also due to a very weak consumer environment leading to trading down and margin pressure.
The consumer sectors place great emphasis on consistent organic growth particularly volume growth. Many of the sub-sectors base their strategy on consumers trading up, but there is also a litany of changing trends impacting individual sectors. Going forward the major question is whether trading up will be sustained given the consumer experience and whether that invalidates the base strategy of many consumer companies.
Our Consumer Team
Jonathan Leinster
33 years on Consumer Staples sell side primarily at UBS, Berenberg and SG
Our Approach
As sector specialists, we aim to articulate the growth prospects and risks across the wider consumer staples and discretionary sectors, notably the Food Producers, Tobacco, Beverages, Home and Personal Care, General Retail and Food Retail sectors. We set this against the context of the wider market – primarily the STOXX Europe 600, but also the S&P-500 for US stocks – and remain benchmark aware by incorporating the relative growth and outlook of our specialist sectors versus the wider market for context and weighting assessment.
Our four primary strategies to generate alpha are:
1.
Sub-sector relative or rotational trades – e.g spirits v soft drinks, general retail v food retail and, luxury goods
2.
Absolute longs or shorts, utilising DCF, peer group and current v historic valuation methodologies
3.
Stock pair trades – where there are valuation and growth rate discrepancies within sub-sector
4.
Sector relative single name ideas
Our Edge
A wealth of experience, deep knowledge of the sector, combined with the flexibility in approach, ability to cherry-pick best ideas and avoid stale coverage. Services include a regular flow of value-add ‘Sales Desk’ and analytical commentary; generation of money-making, actionable investment ideas; direct access to specialist sales (scheduled calls /emails). We can help investors understand the history, products and prospects of individual companies as well as contextualise the sector within the current macro-environment.