U.S. stocks plummeted 5.2% last week, and European markets held up only slightly better. The Stoxx Europe 600’s SXXP, +1.44% gave up 5%, cutting its 12-month gain to about 1%. Strategists pinned the drop in part on the need for a healthy correction after the runup of the past few months, and on rising bond yields, which ticked up on sign of impending inflation. The higher yields lured money out of equities.
Market bulls aren’t throwing in the towel yet. “We may have moved from being ‘overdue’ for a pullback to approaching ‘overdone,’” Mark Haefele, the Zurich-based global chief investment officer for UBS Wealth Management, said in a note to clients.
Recent equity selling has resembled “generic ‘risk-off’ behavior,” Steven Andrew, a London-based multi-asset fund manager at M&G Investments, said in emailed comments, adding that “from a fundamental standpoint, little seems to have changed. Our predisposition would be to add equity exposure.”
Don’t bank on big changes in European Central Bank policy, other strategists suggested. At its January meeting, the ECB made no changes to interest rates, kept its forward guidance in place, and reiterated that a bond-buying program is intended to run until the end of September, or beyond if necessary. Meanwhile, the Bank of England said Thursday that British interest rates might rise sooner than previously expected as the BOE made no changes to monetary policy. But analysts emphasized that the central bank’s moves will depend on how Britain’s planned departure from the European Union unfolds.
“One of the reasons given to explain the sell-off has been a shift in expectations regarding inflation and what this means for central-bank policy,” HSBC’s multi-asset strategy team said in a note. But there is “little reason for the ECB to change the asset-purchase program or its guidance at this stage,” the team, led by Pierre Blanchet, added.
HSBC advises caution. Eurozone stocks are at risk because they’re typically weak performers during broad corrections, and companies have experienced a hit to earnings due to the strengthening euro, Blanchett and his colleagues said.
When the going gets tough, the prudent get defensive. Hence, the appeal of consumer-staples stocks. The sector has proved resilient even as the broad market slumps, and several stocks have particular appeal.
Henkel HEN3, +1.40% , Unilever UL, -0.68% , and Reckitt Benckiser Group RB., +1.46% look good to a team of Berenberg analysts who cover companies producing packaged foods, household items, and personal-care products. The team names them as its top picks, and said in a recent note that all three offer “a mixture of attractive relative valuation, organic growth acceleration, margin expansion, and M&A [merger and acquisition potential], while showing agility in their business models.”
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Unilever and Henkel trade around 18 times forward-year estimated earnings, below the Consumer Staples Select Sector SPDR fund’s XLP, +0.21% multiple of 20, while Reckitt’s forward P/E matches that popular U.S. fund’s multiple. Each stock scores a Buy rating from Berenberg, which has price targets that imply a rally of more than 20%.
Henkel, whose products include All and Persil ProClean laundry detergents, Dial soap, and Right Guard deodorant, has “shown that it can turn around challenged businesses (e.g. professional hair care) and scale up where needed (e.g. U.S. laundry and hair care),” say Berenberg’s James Targett, Rosie Edwards, and their colleagues.
More than half of the German company’s sales come from its adhesives business. That unit ought to repeat last year’s 5% organic growth due to an expanding global economy, new end markets, and other factors, the bank reckons.
Anglo-Dutch giant Unilever, whose shares trade in the U.K. ULVR, +0.94% and UNA, +0.96% as well as New York, is “taking the biggest steps in the industry to increase the agility of its business model, reduce costs, embrace digital and e-commerce, and future-proof its portfolio,” Berenberg’s team says.
The parent company for Lipton tea and Dove soap had a “dampened market reaction” to its earnings report this month because of a softening in pricing and vague guidance on margins and stock buybacks, but the fourth quarter looked strong overall.
Reckitt looks poised to return to growth after troubles last year due to a massive cyberattack, a South Korean boycott, and other problems that don’t appear structural, according to the Berenberg analysts. The parent company for Lysol wipes and Durex condoms has generated headlines this month because of its interest in Pfizer’s PFE, +1.58% consumer health-care business. The possibility of a deal has spooked some investors, but Morgan Stanley analysts see brands such as Advil that “would complement RB’s portfolio.”
They note that a deal might not be done with a “vanilla” acquisition structure. They are more bullish than any other analyst team, according to FactSet, with a price target on Reckitt of 9,000 pence ($125), implying a rally of more than 40%.