Features | Sectors | 5 Mins Read | by
In the 42 years to 2009 the US consumer staples sector was the top performer. The US technology sector was the weakest performer and the most volatile. But times have changed.
The technology sector has performed well since 2010, and now accounts for almost a quarter of the S&P 500 index. If we include Amazon, Facebook and Alphabet, the IT sector accounts for 32% of the S&P 500.
The consumer staples sector has underperformed in recent years and is only 7.2% of the S&P 500 index. There has been a stark reversal of fortune for tobacco and packaged food stocks.
The below article considers the drivers of this change:
Apple Inc versus Coca-Cola
The sector divergence is illustrated by Apple and Coca-Cola. Shares in Apple Inc have been on a tear since 2009; Coca-Cola's share price has made modest progress.
The iconic 1971 ad "I'd like to buy the world a Coke" may need updating to "I'd like to buy the world an iPhone."
The iPhone operates as a smartphone duopoly alongside Android. In the soft drinks market, Coca-Cola and Pepsi are the market leaders.
Information technology sector
Microsoft CEO Satya Nadella recently stated that:
The defining secular trend will be the increasing rate of digitization of people, places and things. This malleable power of software will drive productivity growth across all industries – leading to more inclusive economic growth, far beyond the domains of consumer tech today.
Tech spend as a percentage of GDP is projected to double over the next decade.
This is on the back of digitisation and the shift towards cloud services. Microsoft's cloud business, Azure, has been the main driver of growth in recent years.
Cloud services have also been the key driver for market leader Amazon. Amazon Web Services is the group's most profitable and fastest-growing division.
Payment companies Visa, Mastercard and PayPal are benefiting from a shift away from cash. Software companies like Adobe and Salesforce provide critical services to their clients.
Apple Inc's iPhone is a product that many of us would struggle to live without. The iPhone market is mature, but related areas are performing well e.g. services and wearables.
Information technology companies have resilient franchises and attractive growth prospects. This is a sharp break with the past when the IT sector was notoriously volatile.
S&P 500 IT sector versus S&P 500 (£ ETFs)
Information technology: payment power
The information technology has benefited from increased exposure to payment companies. Visa listed in 2008, Mastercard listed in 2006 and PayPal listed in 2015.
The three payment companies currently account for 11.8% of the S&P 500 IT sector. There are a number of other payment companies in the IT sector that are also doing well.
The payment sector was not a meaningful contributor to the IT sector in the 42 years to 2009. But it will be a meaningful future driver of the sector's returns.
Consumer staples sector
The consumer staples sector is broken down into 1) beverages 2) food 3) tobacco 4) household products & personal care. These areas have been steady stock market performers in the past.
Consumer staple giants have come through the economic downturns without significant collateral damage. Growth hasn't been rapid but it has been reliable.
The picture, though, has started to become more difficult for the consumer giants.
The tobacco sector is feeling the impact of declining sales and increasing regulation. The shift towards vaping appears to be more of a threat than an opportunity.
Packaged food companies are contending with shifts in consumer tastes. Brewers have seen volumes stall and are dealing with new craft beer competitors.
Household product companies are up against own brand competition with discount supermarkets aggressive on price. Cosmetic companies have also seen new entrants rapidly emerge such as Kylie Cosmetics.
S&P 500 consumer staples sector versus S&P 500 (£ ETFs)
Proctor & Gamble, Kraft Heniz and Unilever
Proctor & Gamble is the largest US consumer staples business and has seen sales pickup. The business had suffered from poor like-for-like sales and new disruptive competition hitting its Gillette shaving franchise.
Kraft Heinz owns a number of packaged food brands that are poorly positioned. Kraft Macaroni Cheese is unlikely to find favour again with young consumers.
Unilever is generating relatively little growth in developed markets. The company exited its mature spreads business in 2017 and is considering selling its declining tea business.
Fourth quarter underlying sales growth for Unilever cam e in at only 1.4%. This was the slowest pace in a decade and compares to a target for 3-5% growth.
Many consumer staple companies have seen the pace of growth stall or go into decline.
Kraft Heinz in decline
Some consumer goods stocks can still perform
The consumer staples sector still has a number of attractive segments.
Most cosmetic brands should stand the test of time. Chocolate and snack companies like Mondelez and Lindt have continued to perform well.
The brands owned by spirits brands appear to be timeless. Johnnie Walker and Aperol are unlikely to be disrupted. Coca-Cola and Pepsi Co have largely offset declining soft drink sales in the West.
But investors clearly need to be more selective when selecting consumer goods companies. The tobacco sector may now be in permanent decline.
Davide-Campari's revenue and profits: the maker of Aperol
Consumer staples companies have been great to own in the past. But brands are increasingly under pressure due to changing consumer tastes and disruptive competition.
The information technology sector has previously been a difficult area to invest. But the current crop of tech stocks, though, appear to have stable and resilient franchises.
Tech companies now have many of the characteristics that consumer staple groups used to enjoy. Many IT companies have strong customer relationships and long term growth drivers.
What Works on Wall Street James O'Shaughnessy (2011)
This article was in part inspired by the J.P. O'Shaughnessy's book. What Works on Wall Street details what did work in the past. But the past is only a guide to the future to the extent that the future mirrors the past.
Jim can be followed on Twitter: @jposhaughnessy
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