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e-mail: ymca@ymca.ru


     
 

author author
Bush administration
 
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business
 
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City officials
 
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But looking ahead
 
Follow Mr Market before consumer crash The consumer staple companies certainly fit the investment king's description: their products basic personal or household items such as shavers, toothpaste or washing up liquid are cheap to produce, but sell at a relative premium, packaged in ubiquitous brand names that dominate supermarket shelf space. In the jittery macroeconomic environment of recent years, these companies have become safe haven investments. Their shares have significantly outperformed the stock market on the basis of seemingly reliable cashflow and dividend streams. Some commentators even refer to them as "the expensive defensives" because of this. But looking ahead, the investment case for these companies may be far less rosy. I see two headwinds: First, powerful long term structural changes in consumer behaviour are slowly undermining the dominant position occupied by many consumer staple brands. The vast majority of basic household products are still purchased on the High Street, but e commerce is growing rapidly in this space. Experience from other industries suggests that scale is the critical factor here. The manufacturers of products where usage is regular and predictable, and shipping costs are low, have shown themselves to be particularly vulnerable to disruption. Witness the recent success of Dollar Shave Club in the US as a model of things to come. E commerce has already eroded the business models of many high street retail brands such as Blockbuster, HMV or Comet. That's not the biggest danger for consumer staples. Instead, their problem is growth or lack of it. As e commerce penetration increases, it will be harder for consumer staples to sustain their already fairly pedestrian growth rates. Again, experience from other industries suggests it is not the incumbents who capture this new online growth, but the more innovative and recent entrants to the market. One solution is to acquire this growth, as Unilever did with the aforementioned Dollar Shave Club. Yet these acquisitions come at the cost of diluting the firm's overall return on capital, as they will only be possible at very high valuations. Another solution is consolidation. In the past few weeks, Reckitt Benckiser has agreed to buy Mead Johnson, and Buffett's Kraft Heinz has attempted but failed to buy Unilever. These deals are about cutting costs and leveraging balance sheets to create a more attractive earnings growth trajectory. Investors are cheering this cheap jerseys today, but these deals are being done at a high price. It remains to be seen how much genuine value can be created when five or more years of perfectly executed synergies are http://www.cheapjerseys11.com/ required to justify these deals' financial metrics. The second major headwind is valuation. Within the UK stock market, the household products sector trades on a price to earnings ratio of more than 20 times, with a free cashflow yield of barely 4%. This is a rich valuation in absolute terms and a significant premium to the wider UK market. Bulls will point out that the sector has always commanded a premium valuation by virtue of its "quality" business model characteristics. This has certainly been the case in recent years, during which time these companies have mostly performed pretty well operationally. Such high valuations reflect a perception of stability and predictability, against a backdrop of a cyclical and structurally uncertain world. But these valuations are unlikely to be sustained if investors start seriously questioning the long term growth profile of these companies. An additional factor to consider when reflecting on these companies' high valuations is the role of monetary policy. Since the financial crisis in 2008, interest rates around the world have headed ever lower. As a result, investors have been forced up the risk curve to find income producing financial assets. With many of the traditional yield paying sectors such as banks and energy disappointing, it is easy to see why the consumer staples sector has attracted a scarcity premium. This effect is impossible to quantify, but as US interest rates look set to head higher over the near term, the sector may see investor appetite wane. Investor and economist Benjamin Graham was known as the father of value investing. One of his great contributions to investing was "Mr Market" the concept of a psychopathic individual with a tendency to swing from delusional optimism to unreasonable pessimism. Today, Mr Market is singing the praises of consumer staples far and wide. With the ingredients all in place for a very different view down the line, some investors may feel they wish to take advantage of Mr Market's current mood while it lasts. Matthew Tillett is UK equities portfolio manager at Allianz Global Investors Click the Adblock/Adblock Plus icon, which is to the right of your address bar. On Adblock click "Don't run on pages on this domain". If you are Private Browsing in Firefox, "Tracking Protection" may cause the adblock notice to show. It can be temporarily disabled by clicking the "shield" icon in the address bar.
We can say anything
 
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These examples
 
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A worldwide competition
 
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That why I have withheld my support
 
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