The Consumer Sector: Discretionary & Staples
June 29, 2011
With the global economy facing a murky outlook, now is a good time for us to review the differences between the consumer staples and discretionary sectors as consumers adjust their budgets accordingly
Author : iFAST Research Team
KEY POINTS
-Consumer staples are defensive in nature while Consumer Discretionary is sensitive to economic cycles
-Consumer staples have started to outperform the market and their discretionary peers
-Consumer staples dividend yield is expected to continue to grow
-Consumer discretionary's forecasted EPS growth is expected to remain strong through 2013
-Beware the consumer discretionary sector's cyclical earnings
With the global economy facing a murky outlook, stock markets have been retreating over the past month with almost all of the major indices posting negative returns for the month of June (as of 17 June 2011), erasing most of their gains on a year-to-date basis. Amidst such an environment, consumers might have started tightening their belts with regards to their spending. As such, now is a good time for us to review the differences between the consumer staples and discretionary sectors as consumers adjust their budgets accordingly.
Consumer Staples are typically seen as being more defensive in nature due to demand for their products being relatively inelastic as they are fundamental and essential to daily life. Products such as tooth-paste, soap, food and drink are examples of such goods. The steady demand for such staples makes the sector an attractive one in uncertain times as per the present. Names such as Kraft, Johnson & Johnson (J&J) and Procter and Gamble (P&G) belong to and are representative of the sector. The Consumer Discretionary sector is typically comprised of companies whose products and services are highly sensitive to economic cycles. These goods are non-essential and usually bear the hallmarks of a luxury good. Examples of such goods and services are jewellery, restaurants, automotives and leisure equipment. Companies such as Bayerische Motoren Werke AG (BMW), Tiffany & Co., Louis Vuitton Moet Hennessy and Prada are but some of the conglomerates within the sector.
SECTORIAL DIFFERENCES
Both sectors offer different propositions for investors depending on what type of gains they prefer. Historically, Consumer Staples tend to offer investors a higher dividend yield due to the steady nature of their businesses and the trend is not expected to change as seen in Table 1. The dividend yield of Consumer Staples seems set to continue its growth over the next few years and maintain the gap between itself and the Consumer Discretionary sector. With consistent earnings, Consumer Staples are capable of continuing their attractive dividend payouts which in the long run, impacts the total returns of an investor significantly if the dividends are reinvested.
CONSUMERS ALWAYS SPEND, BUT WHAT THEY SPEND ON CHANGES
While both sectors look attractive based on valuations, with the global economy seemingly set to slow down on the back of renewed concerns of sovereign debt issues and high unemployment in the developed markets and monetary tightening effects in the emerging markets, the more defensive Consumer Staples sector might just be the safer choice given the current economic environment and uncertain outlook for investors who are risk adverse. With consistent earnings and attractive dividend yields, the Consumer Staples sector would provide a better shelter for investors (as compared to their Consumer Discretionary peers) should the markets correct.
p/s: Compare to our BURSA, selain dari 'branding', cuba lihat staples/dicreationary product IPO tu..
