Play safe with Consumer Staples ETFs as confidence deteriorates

Feb 8th, 2013 | By | Category: Equities

With the Dow Jones Industrial Average flirting with the 14,000 mark and the S&P 500, FTSE 100 and Nikkei 225 at multi-year highs, it would be easy to assume that all is rosy in the investment world.

Play safe with Consumer Staples ETFs

Consumer staples include everyday necessities like food, drink and toothpaste. The inelastic demand for these products makes the sector an attractive defensive holding.

Indeed, a lot of data lately have been strong. In the US, for example, non-farm payrolls rose by 157,000 last month, with November and December’s figures revised up, adding an extra 127,000 jobs. The country’s trade deficit also improved, shrinking to its narrowest in nearly three years. Elsewhere, Chinese exports grew more than expected in January, and in Germany, recent data revealed a trade surplus for 2012 that was the nation’s second highest in more than 60 years.

However, while certain economic data may appear to be turning the corner, there remains much wrong with the world economy. And this is not lost on consumers, who continue to feel the pinch. While financial markets are benefiting from global quantitative easing (essentially money printing), the inflationary effect of these monetary programmes is hitting consumers, who are seeing prices rise out of sync with pay.

Consumer confidence surveys reveal how bad things are. The latest US Consumer Confidence Index from The Conference Board, an independent business membership and research association, showed that consumer confidence fell sharply in the US in January, following a similar decline in December.

Lynn Franco, Director of Economic Indicators at The Conference Board, said: “Consumer Confidence posted another sharp decline in January, erasing all of the gains made through 2012. Consumers are more pessimistic about the economic outlook and, in particular, their financial situation. The increase in the payroll tax has undoubtedly dampened consumers’ spirits and it may take a while for confidence to rebound and consumers to recover from their initial pay-cheque shock.”

Consumer confidence has also taken a beating globally. According to the latest Nielsen Global Survey of Consumer Confidence and Spending Intentions, consumer confidence declined or was flat in over two-thirds of the 58 countries measured in the fourth quarter of 2012, compared to the prior quarter. Across the board, global discretionary spending patterns showed deterioration, with spending intentions for holidays/vacations, out-of-home entertainment and new technology all sharply down.

Dr Venkatesh Bala, chief economist at The Cambridge Group, a subsidiary of Nielsen, said: “Consumers around the world grappled with increasing economic concerns as the eurozone crisis spread from troubled to core countries, the United States fiscal cliff threat loomed large, and China’s rising inflation sparked monetary policy action. Consumers are proceeding with caution in 2013 and showed renewed discretionary spending restraint in the fourth quarter amid further global economic and political uncertainty.”

FEATURED PRODUCT

DB X-trackers MSCI World Consumer
Staples Index UCITS ETF (XWSS)

– Provides targeted exposure to 125 of the world’s
largest consumer staples companies, across 18
countries

– Major holdings include Nestle, Procter & Gamble,
Coca-Cola, Philip Morris and Wal-Mart Stores; US
and UK companies comprise approx two-thirds

– Over-collateralised swap-based replication,
with full transparency to index constituents and
underlying collateral holdings

– UCITS compliant, London listed, UK Reporting
Status, eligible for ISAs and SIPPs, TER 0.45%,
cross-listed on Deutsche Börse and Borsa Italiana

Dr Bala added: “With continuing uncertainty about the US debt ceiling and mandated spending cuts, along with as-yet-tentative signs of economic stabilisation in Europe, we can expect continued caution and moderate growth in the first quarter of 2013.”

In this kind of environment, consumer staples often do well. The sector includes everyday “necessities” such as food, alcohol and cigarettes, as well as domestic products like washing-up liquid and toothpaste. Because these items have relatively inelastic demand, the sector can represent a solid defensive portfolio holding during times of market volatility.

Brad Sorenson, Director of Market and Sector Analysis at the Schwab Center for Financial Research, said: “The staples group is considered defensive because it tends to sell items that will be purchased regardless of the economic environment, such as toilet paper and laundry detergent.”

With confidence fast evaporating from consumers, the sector should appeal to investors right now. Of course, this appeal has not gone unnoticed. In fact, the consumer staples sector has been one of the strongest performing over the past few years – the go-to sector, along with utilities and pharmaceuticals, during times of turmoil. To demonstrate, the MSCI World Consumer Staples Index is up 18.94% over the past 12 months, compared to 11.97% for the parent MSCI World Index.

As a consequence of this outperformance, the valuation of the sector may appear a little rich relative to its past, based on price-to-earnings (PE) and price-to-book (PB) ratios. However, with the US heading towards a “debt ceiling” showdown, potentially in May; ongoing troubles in Europe; and the overall market looking somewhat heated following a strong start to the year, the sector is likely to continue to do well. Fortunately for investors, there are numerous exchange-traded funds (ETFs) offering exposure to the sector on a country, regional, world and emerging markets basis.

As a core defensive holding, the db X-trackers MSCI World Consumer Staples Index UCITS ETF (XWSS) from Deutsche Bank (see featured product) offers low-cost access to all the major names in consumer staples and comes with the added benefit of international diversification. The largest industry weightings include Packaged Foods & Meats (24.10%), Tobacco (14.69%), Household Products (14.19%), Soft Drinks (10.71%) and Hypermarkets & Super centres (8.62%). In terms of geographies, 18 countries are represented; however, the US and the UK form the largest block, with 51.98% and 15.03%, respectively.

Major players at the stock level include Nestle (7.98%), Procter & Gamble (7.24%), Coca-Cola (5.29%), Philip Morris (5.20%) and Wal-Mart Stores (4.55%), followed closely by Pepsi, British American Tobacco and Diageo. With their recognisable brands, these companies offer dependable revenues in developed markets but also offer growth opportunities in emerging markets. Nestle, P&G, Coca-Cola, Philip Morris and Wal-Mart all look strong and are generally rated ‘hold’ or ‘buy’ by the majority of analysts, according to data from Reuters. Diageo and British American Tobacco possess ‘strong buy’ recommendations.

In addition to the db X-trackers MSCI World Consumer Staples Index UCITS ETF, UK/European investors are able to specifically target the consumer staples sector in Europe, the US, Emerging Markets and Asia:

Amundi ETF MSCI Europe Consumer Staples ETF (CS5)
Tracks the performance of the MSCI Europe Consumer Staples Index.

Consumer Staples S&P US Select Sector Source ETF (XLPS)
Tracks the members of the S&P500 index classified as Consumer Staples.

db X-trackers MSCI EM Consumer Staples Index UCITS ETF (XECS)
Tracks the performance of the MSCI Emerging Markets Consumer Staples Index.

Lyxor ETF MSCI AC Asia ex Japan Consumer Staples (COSG)
Tracks the performance of the MSCI All-Country Asia ex Japan Consumer Staples Index.

All the above funds are listed on the London Stock Exchange, though many have cross-listings on other European exchanges and/or are registered for distribution in much of Europe.

For US investors, the NYSE Arca-listed iShares Global Consumer Staples ETF (KXI) offers global exposure to the consumer staples sector.

(Aaron Pinnock contributed to this article.)

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