Estimated read time: 4 minutes
Publication date: 12th Jan 2022 10:28 GMT+1
Investors have been betting on defensive consumer staples companies to hedge against market volatility. This is evident from iShares U.S. Consumer Goods ETF’s (AMEX: IYK) that has gained 15.73% over the past year. Moreover, the ETF gained 0.76% year-to-date, outperforming the benchmark S&P 500 index’s 1.69% decline over this period. IYK’s popular holdings include Procter & Gamble (NYSE: PG), Pepsico (NASDAQ: PEP), Coca-Cola (NYSE: KO), and Phillips Morris International (NYSE: PM).
Given its non-cyclical nature, consumer staples companies tend to enjoy a stable growth rate over the long term that also allow them to provide investors a regular dividend.
With various macroeconomic headwinds resulting in surging market volatility which is evident from the CBOE Volatility Index’s 8.94% gains so far this year. So, investors are expected to set aside a portion of their portfolios toward these stable stocks that generate predictable cash flows.
Below are some of the major trends shaping the consumer staples stocks:
The initial wave of the pandemic saw a surge in panic shopping, as people loaded up essentials before lockdowns. This caused consumer staples products to sell out like hotcakes, requiring shelves to be restocked before the average depletion period.
As the omicron coronavirus cases spread globally, causing several countries to reimpose partial lockdowns, the demand for consumer staples products might skyrocket soon. Thus, the renowned companies manufacturing day-to-day essentials might witness surging sales and profit margins in Q1 of 2022.
The demand for consumer staples products are expected to remain stable despite the inflation levels rising to 40 year highs. Given the consistent demand levels, these companies are expected to maintain their profit margins in the upcoming quarters.
Moreover, as the markets remain volatile with the benchmark S&P 500 and tech-heavy Nasdaq 100 indexes slumping year-to-date, consumer staples stocks can help investors outperform the broader markets to generate positive returns in the near term.
In addition, the Federal Reserve has hinted toward hiking the interest rates by up a significant margin this March, which might cause the broader equity markets to take a hit again. However, consumer staples stocks are expected to remain stable over this period, given the defensive nature of the underlying companies.
Supply Chain Headwinds
Due to supply chain disruptions and surging inflation levels, consumer Staples products are expected to become more expensive in the upcoming months. Additionally, rising COVID-19 cases around the world and shipping container shortages, has meant supply chain headwinds intensified over the past few months. As delivery shipments get delayed while entering the borders and shipping fees and tolls increase, the transportation barriers might intensify in the initial months of the new year.
The consumer price index rose 6.8% in November last year, affecting consumer products substantially. Moreover, as consumer spending remains high due to record low unemployment rates and increasing wages, everyday items are expected to be the first to witness a price hike soon.
Consumer staples have historically underperformed the broader markets, but delivered double digit gains annually. This trend is expected to continue in 2022 as well.
However, analysts predict stable fast moving consumer goods (FMCG) stocks to beat the broader markets in the near term, as the Fed’s hawkish policies and other macroeconomic headwinds maintain pressure on equity markets.
Furthermore, renowned consumer staples stocks pay dividends periodically, making them ideal for fixed income investors. Investing in these stocks can help investors generate relatively higher returns compared to fixed-income instruments. Moreover, with market volatility causing riskier equities to witness frequent fluctuations, FMCG stocks are expected to gain traction among retail investors who are willing to hedge the market risks to a certain extent.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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