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International Consumer Staples: Local, Global and Points In-Between

March 15, 2017
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How might the global political landscape affect the consumer staples sector stocks, mutual funds, and ETFs that concentrate on the sector? For a sector with which most of us participate on a daily basis, the question is not a simple one to answer.  

The short answer? “It’s multi-faceted in the current shifting international landscape.” If you’re considering buying or selling the sector, here are five indicators to monitor.

But First, a View from Above

The consumer staples sector includes companies whose products may be less sensitive to the economic cycle, and have traditionally been considered a defensive sector. After all, no matter the phase of the business cycle, consumers will still need to buy food, diapers and other staple products. Shifting out to the international landscape, major U.S. corporations such as Proctor and Gamble (PG), Coca Cola (KO), Wal-Mart (WMT) and PepsiCo (PEP) sell consumer staples products to foreign buyers.

"Consumer staples are countercyclical and less sensitive to swings in the economic cycle. They sell goods in demand no matter what is going on in the broader economy," says Patrick O'Hare, chief market analyst at "People still have to eat, they get sick and still go to the drugstore, When the market gets a little dicey, consumer staples exhibit relative strength,” O'Hare says.

Typical characteristics of consumer staples investments according to O'Hare:

  1. Tend to be dependable earnings performers
  2. Generally pay dividend
  3. Lower beta than the broader market, trade in a less volatile fashion
  4. Investors favor this sector during periods of uncertainty

5 Indicators Investors Can Monitor

Here is a look at five indicators investors can monitor now in the shifting international environment that could impact consumer staples sales abroad.

  1. U.S. Corporate Tax Policy. President Trump has proposed shifts to the U.S. tax code, which might incentivize U.S.-multinational companies to repatriate the estimated $2 trillion-plus in cash currently being held abroad, and might also lower the corporate tax rate that currently stands at 35%. 
    "This may be the biggest thing to watch – the tax policy that comes out of D.C.," says JJ Kinahan, chief market strategist at TD Ameritrade. "If companies have business offshore and they can bring that money back to the U.S. it may increase their appetite to do more offshore," Kinahan explains. 
  2. Border Tax. There has been talk of a "border adjustment tax" related to U.S. imports. The risk is that foreign countries could retaliate with similar measures of their own, which could increase the cost of U.S. exports—including U.S. produced consumer staples products sold abroad. "That could decrease appetite for demand of these products," Kinahan says. 
    Regarding its possible effect on the market, O'Hare adds: "If you saw a strong embrace of protectionism it wouldn't sit too well with the stock market, with the potential for rising inflation and lack of earnings growth," O'Hare says. 
  3. The U.S. Dollar. The exchange rate of the U.S. dollar is an important factor for investors to consider, in relation to U.S. multinational corporations that sell consumer staples products internationally. The Federal Reserve is expected to raise interest rates several times in 2017, which generally supports a rising U.S. dollar trend. That in turn can make U.S. products sold abroad more expensive to foreign buyers, which could depress demand for U.S. goods. 
  4. European Elections. The euro area faces a number of key elections in 2017 including the Dutch election March 15, and elections in France and Germany later in the year. Foreign markets are a major destination for many U.S. consumer staples companies. "The sector overall derives one third of its sales from outside the United States," O'Hare says. "Coca Cola and Procter and Gamble derive more than 50% of their sales from outside the U.S."
    The outcome of the European elections has the potential to impact policies and attitudes that could impact the business climate for U.S. consumer staples firms. O'Hare lays out a potential scenario that could have a potential negative impact on U.S. firm's ability to sell abroad. "The election that is considered a high source of volatility is in France.” If Marine LePen gets elected, for example, and France moves with a referendum to exit from the European Union—it could create a huge amount of uncertainty in Europe and threaten the existence of the EU, O’Hare explains.  
  5. Import/Export Numbers. If you’re considering investments in the consumer staples area, you can also monitor U.S. import/export numbers, Kinahan says. If we are importing more than we export, that is negative for U.S. companies selling overseas, he says. 

TD Ameritrade clients can monitor that data via the thinkorswim® platform . See Figure 1 below.

Trade Balance in thinkorswim platform


In thinkorswim platform, click the “Analyze” tab > Economic Data > Trade Balance: Goods, Balance of Payments.  The chart shows the deficit on our balance of payments for goods. Data source: FRED® database, Federal Reserve Bank of St. Louis. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Current Outlook

With the broader stock market trading at all-time highs, the consumer staples sector has been stretched by historical comparisons. "The consumer staples sector is trading at a premium to its 5-year and 10-year historical P/E average," O'Hare says. He pointed to FactSet data which revealed that the forward price/earnings multiple for the consumer staples sector stands at 20, which is above the 5-year average of 18 and the 10-year average of 16.1.

"It is trading at a 25% premium to the 10-year average. It is important for investors who may be considering investments in a consumer staples sector ETF to understand the sector may not afford them much capital appreciation right now. But it could possibly offer a good outlet for less capital depreciation in a down market," O'Hare concludes.

In addition to consumer staples mutual fund and ETFs, investors looking to gain exposure in this area could also "trade what you know" Kinahan says. That could include investments in individual companies in this sector that also have a multi-national presence, in order to get broad-based domestic exposure as well as "synthetic" international consumer sales investment, he says. 

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