The consumer discretionary sector has easily beaten the broad market since the global recovery began in 2009, and this momentum has continued during 2013, outpacing the S&P 500® Index 36% to 25%, as of early-December.
Will these stocks continue to rise? Two Fidelity portfolio managers think new potential demand from billions of people moving up the economic ladder will help consumer stocks continue to outperform for some time. As a result, there may be wide-ranging areas of opportunities—from toothpaste companies to trendy fashion designers.
Rise of the global consumer
For the first time in the history of the industrialized world, the majority of the global population will soon be in the middle class, according to Robert Lee, manager of the Fidelity® Select Consumer Staples Portfolio (FDFAX). “We estimate that by 2025, 4.2 billion or more of the estimated 7.9 billion global population will be those that have disposable income,” he says.
Much of this progress is due to the rise of the developing world, particularly China, Indonesia, and Brazil. “Almost 85% of the world’s population lives in emerging markets,” says Peter Dixon, who manages the Fidelity® Select Retailing Portfolio (FSRPX). “As these economies continue to expand, rising household wealth should be a primary stimulator of demand for consumer products in particular.”
New consumers emerging from the ranks of the previously impoverished could create an array of investing opportunities. “Think about rural China today, where a large number of people are going from brushing their teeth once a year to once a day,” Lee notes. “Things like that could have major implications for toothpaste producers, for instance, as well as for other consumer staples companies.”
Consequently, this potentially transformative force for consumer sectors, and for the global economy, may underpin consumer stocks for many years to come. “These people are consuming goods that generations before them never did,” adds Lee. “As a result, there may be vast new growth prospects for companies that provide consumer goods.”
Pockets of investing ideas in consumer sectors
Toothpaste demand is just one example of a consumer industry that may profit from a rise in global consumption. In addition to Colgate-Palmolive Company (CL)—which is one of the largest producers of toothpaste and other consumer staples products—Lee identifies multinationals like The Coca-Cola Company (KO) and Nestle SA (NESN) as examples of companies that are already entrenched with operations globally. “You can find these companies’ products in pretty much every country of the world.”
A segment of the consumer discretionary sector that Dixon thinks has considerable growth prospects is “fast fashion.” This is an industry in which high-end runway trends are brought to market quickly and cheaply for mass-market consumption. “A driver of fast fashion apparel growth,” Dixon notes, “is that fashion trends are becoming increasingly global due to technological advances.”
Emerging market demand is playing an increasing role in the demand for clothing apparel, including luxury goods. “Chinese buyers, for example, are now the world’s largest consumer of luxury goods—more so than the U.S.,” Dixon says. “This group alone accounts for 25% of luxury spending.”
Yet stylish fashion trends are not the only possible opportunity in retail. Many general apparel items that are so commonplace in the United States and other developed markets could find rapid adoption among a new consumer class rising from within emerging markets. “In my view, companies that make watches, handbags, and yoga pants have a lot of long-term growth potential as millions of new entrants to the middle class have more money to spend on these types of items,” observes Dixon.
The five largest public apparel retailers by market capitalization are The TJX Companies, Inc. (TJX), Inditex SA (ITX), Hennes & Mauritz AB (HNNMY), The Gap Inc. (GPS), and Fast Retailing Co. Ltd. (FRCOY). Inditex and Hennes & Mauritz have the largest sales exposure to fast fashion.
Investors may also want to consider companies that buy closeout goods from other retailers. “My fund has exposure to off-price retailers,” Dixon says, “because I believe they could continue to attract consumers with a combination of strong brands and great value.”
Looking for growth and value
In addition to growth prospects, investors should factor in value. When conducting your own analysis, the price-to-earnings growth (PEG) ratio is one valuation metric that can be used to help assess a stock’s value and growth prospects. Generally, a lower PEG ratio is considered more attractive. Using the Fidelity stock screener, Starbucks (SBUX), Best Buy (BBY), and D.R. Horton (DHI) are common stocks in the consumer discretionary sector that have the lowest PEG ratio as of December 4, 2013.1
Adecoagro SA (AGRO), Spectrum Brands Holdings (SPB), and Avon Products (AVP) are common stocks in the consumer staples sector that have the lowest PEG ratio as of December 4, 2013.
Risks to consumer growth
Of course, investors should be mindful of factors that could slow a global consumer growth story. Among them are the chance for higher inflation, an increase in unemployment or falling wages, weakening consumer sentiment, and slower growth in emerging markets. These factors, in addition to market risks that could broadly temper momentum in stocks, should be weighed when considering consumer stocks.
Moreover, investors may want to consider the relative strength of the consumer sectors and determine for themselves whether there is more room to run higher, given how strong these stocks have been over the course of the past several years.
Nevertheless, as more of the world’s population enters the middle class, and has discretionary income to spend, consumer stocks might be a primary beneficiary. Consumer stocks have helped the market roar back from the depths of the financial crisis, and they may not be ready to cede that leadership position just yet.
- Research the Fidelity Select Consumer Discretionary Portfolio (FSCPX)
- Research the Fidelity Select Consumer Staples Portfolio (FDFAX)
- See whether your investment mix is in line with your long-term goals with Portfolio Review.