Investors have a unique window to buy shares in defensive stocks such as Unilever PLC (LON:ULVR) and Reckitt Benckiser Group PLC (LON:RB.) before the market carries them higher, analysts at Berenberg have suggested.
The recent performance of the consumer staples sector relative to the market is currently showing a “rare dislocation” from global bond yields of late, the German bank said in a note published on Wednesday.
“Historically, such dislocations have been good lead indicators to sector outperformance,” analysts said in the note, pointing to data going back to the mid-1990s.
This is thought to reflect the sector’s “bond-like” characteristics, namely the good visibility on dividends due to the companies’ highly cash-generative business models and exposures to less-discretionary consumer products.
Since the beginning of the year, bond yields have fallen from +2.7% to +1.7% while the consumer staples sector outperformed the market by 3%.
Based on the ‘normal’ historical relationship in recent years this would have been expected to result in a 21% outperformance.
Rising tide may not lift all boats
“There have not been many dislocations of this magnitude since 2000,” Berenberg said, suggesting the wider consumer staples should outperform the market by 16%, with the household and personal care (HPC) sub-sector due around 10% relative upside.
But analysts said the “rising tide may not lift all boats”, as different HPC stocks have not all moved as one in recent months.
Unilever and Reckitt Benckiser were picked out as the best London-listed HPC names, both rated ‘buy’, with a target price of 5,350p and 7,420p respectively.
On Wednesday, both closed around 1% higher, with Unilever finishing on 4,608.5p a day ahead of its third-quarter trading statement was due, and RB ending the day on 5,993p.
For RB, the analysts identified two key catalysts for RB over the next 12 months, the first being quarterly results in late February, “when new CEO Laxman Narasimhan will present a revised strategy and reset organic sales growth and operating margin expectations”.
Unilever, on the other hand, “suffers from its exposure to categories offering limited medium and long-term growth prospects”, though it has a good record on keeping market share, is “taking more steps than most peers to reposition its portfolio” and has the highest exposure to Asia-Pacific emerging markets.