Credit Suisse says: “Consumer staples: going further
Underweight; Downgrade Beverages to Benchmark from Overweight.”
“Consumer staples has been our preferred funding sector for our
summer upgrades to cyclicals and financials. We remain underweight
food producers and tobacco and reduce beverages to benchmark from
overweight.
“Emerging market growth continues to weaken relative to DM, with
relative PMIs the lowest since the data started (2002). We see
further downside risks to EM FX, with aggregate deviation from PPP
12pp above average. Evidence of firms on-shoring production back to
DM, the removal of fuel subsidies and rising inflation continue to
hurt real incomes, while regulatory investigations are impeding
pricing for some consumer staples.”
Non-cyclicality: “Consumer staples is the sector most negatively
correlated to PMIs (which we believe will continue to improve until
end year) and bond yields (which are likely to move higher, in our
view). We also expect the ‘safety’ premium priced into consumer
staples to diminish.”
Earnings risk: “Earnings revisions for food, beverages and
tobacco are among the worst of all sectors, while margin/revenue
expectations for food and tobacco are among the most optimistic
(relative to their norm).”
Positioning: “Consumer staples are the fourth biggest overweight
for European fund managers and net buy recommendations are
high.”
Valuation: “The sector is trading on a 31% P/E premium, 15pp
above the post-1995 average. EM staples are the most overvalued, on
a multiple 2x that of the domestic market (US tech bubble peaked on
a 2.2 times).”
Style: “Our rising preference for value over growth makes us
favour financials over staples (we use the money from today’s
downgrade to add to banks).”
Not all bad: “The consumer share of GDP is still abnormally low
in China (but not all EMs), providing some support to the
structural growth story.
“We downgrade beverages on valuation (3rd most expensive sector
in Europe, 1 above average on P/E and P/B) and has the 2nd worst
earnings revisions, while sell-side analysts are very bullish on
the sector. Yet, we still prefer beverages to food: same P/E, but
better growth potential and industry structure.
Stocks: “Danone, Beiersdorf and Unilever are Underperform-rated,
more than 10% expensive on HOLT and P/E relative and have negative
EPS momentum.”
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