As we move away from last year’s global themes of one-way capital appreciation and eerily low volatility, the first quarter of this year has served as a reminder to investors that markets do not follow a straight trajectory.
In fact, five months in and 2018 is shaping up to be the year of volatility for global markets, with the volatility index bouncing up to around 20 per cent in March, double last year’s levels.
This instability has been fueled by disputes around global trade policies, particularly between the US and China, the impact of central banks transitioning away from easing monetary policies towards a period of rising interest rates, as well as distrust of US tech giants following the data leaks involving Cambridge Analytica.
For investors, such volatility might signal a transition to defensive sectors of the market to ensure continued returns as the nine-year global equity bull market eases.
There are still global and industry investment opportunities that are more immune to volatility and weaker economic activity. In particular, the consumer staples and e-commerce sectors can provide upside to a portfolio if you know where to look.
Our love of chocolate can weather the market
Consumer staples – the brands we use every day – are the colourful products that compete for attention on supermarket shelves, from toothpaste to chewing gum, chocolate bars to fish fingers. They are also part of an investment sector with major potential.
The sentiment at the Consumer Analyst Group of New York Conference, held in February this year, was one of excitement around revenue growth.
Contributing to this is the flow-on benefits of Donald Trump’s dramatic cuts to company tax in the US.
Many companies are looking to boost their revenue streams by re-investing savings into new products and innovation, particularly to expand the ‘snacking’ part of their portfolio.
One such company is US-based Mondelez. It’s the world’s second-largest confectionary manufacturer with household brand names such as Cadbury, Oreo, Toblerone and Milka within its portfolio. While well-loved across the US, 76 per cent of its revenue comes from outside the country, with 35 per cent attributed to emerging markets such as India.
While many sectors find themselves rising in good times but suffering in a downturn, the consumer staples sector is favourable because it is counter-cyclical.
Consumers continue to buy chocolate bars and frozen dinners no matter the over-riding economic conditions and the strength of the brands as household names is a buffer to market competition and online disruption caused by the rise of e-commerce.
The e-commerce whirlwind set to gain velocity
The e-commerce whirlwind has caused widespread digital disruption but it is also a growth engine that is only getting revved up.
Globally, bricks and mortar stores continue to dominate with 90 per cent of sales coming from this channel; however, strong e-commerce growth is expected as this sector matures over the next five to 10 years.
China’s consumers are leading the charge, currently driving 20 per cent of sales from e-commerce. It is expected other markets will follow thanks to the growing popularity of mobile shopping, and improvements in logistics and supply chains contributing to quicker delivery times and the ubiquity of smart phones.
Although Amazon has been the centre of attention for many investors, there are many investment opportunities that are flying under the radar.
Perpetual owns shares in recognisable brands such as Alphabet, owner of Google, and eBay, as well as Chinese online retailer Vipshop. In recent times Vipshop has invested heavily in logistics and warehousing.
It now completes 90 per cent of last mile delivery for the apparel it sells – so it’s in control of the customer experience.
Investors might also consider investing in companies supporting the online retail trend. FedEx, for example, is adapting its logistics services to facilitate the delivery of e-commerce orders.
Gaining exposure to industries in global markets that are under-represented in Australia, such as consumer staples and e-commerce, can help investors enhance the risk and return characteristics of their investment portfolios.
It also enables access to new return opportunities from companies and sectors that operate in environments that are very different from your home market.
Garry Laurence is the global equities portfolio manager for Perpetual Investments.
