Looking For Value In Consumer Staples

The relative outperformance of consumer staples stocks in Latin America in relation to consumer discretionary stocks seen over the past four years appears to have run its course and is reaching an inflection point. However, we do not believe that a peak in consumer staples outperformance implies the beginning of a bull-run in discretionary stocks across the region . Instead, we attribute the recent trend reversal to a weakening outlook for consumer staples stocks in Latin America, having been on steep uptrend since the height of the global financial crisis in early 2009.

The multi-year bull-run in the MSCI Latin America Consumer Staples index came to an end earlier in the year, after a break through long-term trendline support near the 650 level. The index has since struggled to break back above support-turn-resistance with a move down to the next line of support at 570 now looking distinctly possible in the near-to-medium term.

The technical picture for the MSCI Latin America Consumer Discretionary index is somewhat less clear, although the broader downtrend in place since 2010 remains unbroken, suggesting that further downside could lie ahead. Having failed to re-test trendline resistance around the 475-500 area, we see room for the index to fall back to long-term support and trade within the 400-470 range .

Reaching An Inflection Point
Ratio Of MSCI Latin America Consumer Discretionary Over MSCI Latin America Consumer Staples Index

The relative outperformance of consumer staples stocks in Latin America in relation to consumer discretionary stocks seen over the past four years appears to have run its course and is reaching an inflection point. However, we do not believe that a peak in consumer staples outperformance implies the beginning of a bull-run in discretionary stocks across the region . Instead, we attribute the recent trend reversal to a weakening outlook for consumer staples stocks in Latin America, having been on steep uptrend since the height of the global financial crisis in early 2009.

Reaching An Inflection Point
Ratio Of MSCI Latin America Consumer Discretionary Over MSCI Latin America Consumer Staples Index

The multi-year bull-run in the MSCI Latin America Consumer Staples index came to an end earlier in the year, after a break through long-term trendline support near the 650 level. The index has since struggled to break back above support-turn-resistance with a move down to the next line of support at 570 now looking distinctly possible in the near-to-medium term.

Uptrend Over
MSCI Latin America Consumer Staples Index

The technical picture for the MSCI Latin America Consumer Discretionary index is somewhat less clear, although the broader downtrend in place since 2010 remains unbroken, suggesting that further downside could lie ahead. Having failed to re-test trendline resistance around the 475-500 area, we see room for the index to fall back to long-term support and trade within the 400-470 range .

Our caution towards discretionary stocks in Latin America is reinforced by recent exchange rate weakness in much of the region, as well as slowing economic growth. Moreover, although monetary easing has further to run in Chile and Mexico, according to our forecast s , interest rates have largely bottomed earlier this year, meaning that access to cheap financing for big-ticket items is likely to become more restricted over the coming months. Particularly in Brazil, where the central bank has continued to raise it benchmark policy rate to 9.50% in October, discretionary stocks will likely strugg le to head substantially higher, given weak growth and notable asset quality deterioration on banks' balance sheets.

Hard To See A Bullish Case For Now
MSCI Latin America Consumer Discretionary Index

A Permanent End To Consumer Staples Rally?

In an environment where we see little scope for major upside in consumer discretionary purchases in the near future, consumer staples retailers and distributors in the region should continue to fare relatively better. However, given the impressive rally seen over the past four years, the picture is less clear cut and therefore will require notable selectivity on the part of investors as the low-hanging fruit has largely been picked, not least from a valuations perspective.

Uptrend To Be Tested
Colombia - Almacenes Exito Share Price, COP

Colombian retail store operator Almacenes Exito has displayed among the strongest secular uptrends among consumer staples companies in the region over the past four years, but the share price may have peaked at the end of 2012. Although the broader uptrend remains in place, and we maintain a generally favourable outlook on Colombian consumers, the technical picture suggests that key trendline support near the COP 30,000 mark, is on course to be tested. Investors will likely ask difficult questions about the company's high valuation , given the share price performance over the past few years . We do not believe that a move lower is inevitable at this juncture, and note that Colombia's favourable macroeconomic outlook may offer attractive entry points upon a continued sell-off of around 7% from current levels.

Consumer Retrenchment Bodes Ill For Chilean Retailer
Chile - Cencosud Share Price, CLP

Having mostly been sideways trading since late 2010, regionally integrated, Chilean multi-brand retailer Cencosud has bee n in a firm downtrend this year. The technical picture has taken a major turn for the worse, in our view, following a break of key support at CLP 2,250 in August, and failing to push back above this level in recent weeks. It now appears that a broader downtrend is likely to remain in place as recent exchange rate weakness in Latin America is likely affecting sales.

Looking Increasingly Attractive
Mexico - Wal-Mart de Mexico Share Price, MXN

Differentiation will be key going forward, and we see potential value in Mexican discount retailer Wal-Mart de Mexico (Walmex), which appears to have already endured substantial downside in recent months. Although additional downside cannot be ruled out, we believe that the share price currently remains well supported and the stock is already heading higher at the time of writing. A break above resistance around MXN34.00-35.00 would be a bullish signal. That said, we note that the fundamental picture is somewhat more uncertain at this stage. Although manufacturing activity appears to be picking up, much in line with our expectations of a recovery in this sector in H213, construction and mining activity continue to disappoint, affecting sentiment.

Break Points To Continued Uptrend
Brazil - Grupo Pão de Açucar

Another consumer staples company in the region, which could see continued upside is Brazilian supermarket and appliance store operator Companhia Brasileira de Distribuição Grupo Pão de Açucar . The company's share price has broken out of a flag formation of late, maintaining its two-year old uptrend in place. Although we remain wary of Brazilian consumers in general, in light of high household leverage ratios, recent exchange rate weakness , tighter monetary policy and a deteriorating growth outlook, a strategically positioned discount retailer with large market share could continue to perform well under these conditions.

Pao Acucar And Walmex Still Offer Value
Valuations Metrics, Price/Earnings (LHS) & Price/Book (RHS) Ratios

From a valuations perspective, P ã o de A ç ucar currently trades well below its 10-year average price-to-earnings ratio at 31.5 x . Although on the higher end of valuations for retail operators in the region, from a historical perspective, P ã o de A ç ucar is trading at a discount. Walmex also has a price-to-earnings ratio somewhat lower than its 10-year average, with a multiple of 24.8 x . While among the highest price-to-book ratio at 4.4 x , implying a very optimistic assessment of the company's book value among investors, Walmex appears to be trading at an historic discount from an earnings perspective, suggesting that further upside potential exists.

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This article is tagged to:
Sector: Country Risk
Geography: Latin America, Brazil, Chile, Colombia, Mexico, Latin America
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