Global equities were weaker over the past week after the Canadian arrest of the Huawei CFO cast doubt on whether the US and China would agree to a trade truce by March 1, 2019.
The risk-off tone saw long term government bond prices rise, pushing yields lower, particularly in the UK where the parliamentary vote on the Brexit agreement was deferred creating further uncertainty.
The risk-off environment saw the US Dollar rise against other major currencies.
Despite last week’s OPEC and Russian agreement to cut oil production by 1.2 million barrels next year, crude prices softened on global growth and oil demand fears.
Volatility in markets has continued to rock investor confidence, with a number of large sell offs over the past month.
The continuing trade tensions between the US and China has undermined confidence following the G20 meeting and sentiment appears to have shifted from buying pull backs to selling rallies.
Concerns have escalated that the US Federal Reserve is likely to tighten too much and cause a recession in the US (maybe as early as late 2019).
However, we continue to believe that the warning signs of a recession remain muted and that this cycle is likely to extend further than expected and surprise investors.
Valuations have now adjusted and risk markets look more attractively priced. We continue to believe that a workable solution is likely to be struck between the US and China on trade which is likely to lead to a relief rally.
We believe some portfolio exposure to the defensive consumer staples sector is warranted near term, in light of current market volatility and rising risk around global and domestic growth.
This stems from concerns around global growth from rising interest rates, Chinese economy slowing from trade tariffs, and the domestic economy experiencing heightened earnings risk from a slowing consumer and housing market.
This is coupled with uncertainty on the impact of an upcoming federal election in early CY19.
Some names we like in the consumer staple sector at the moment include Costa Group (CGC) and Tassal Group (TGR).
Costa Group is Australia’s largest grower, packer and marketer of fresh fruit and vegetables.
CGC is the market leader in Australia's horticulture industry. It is concentrated in high-growth produce categories, enjoys the benefits of a diversified business model and has an impressive management team.
This, coupled with a growing international opportunity ( around 25 per cent group EBITDA: China and Morocco), leaves CGC well placed to deliver double-digit medium term EPS CAGR.
While CGC is not cheap, we believe the risk/reward is now more balanced.
Tassal Group Limited (TGR) is a vertically integrated salmon grower and seafood processor, seller and marketer.
It sells premium Atlantic salmon and seafood products for both the Australian domestic (around 85pc Group Revenue) and Export markets (around 15pc Group Revenue).
Through its De Costi seafood business (around 16pc Group Revenue), TGR sources and processes a wide range of seafood, which is also sold domestically and internationally. TGR is a beneficiary of healthy eating trends and the growing demand for salmon and seafood.
Salmon and prawns comprise 70pc retail seafood sales in Australia. We expect supply and demand conditions to be in TGR’s favour in the near term, with the price of salmon expected to increase. TGR is trading on an FY19 PE of 13.5x and is forecast to grow EBIT by 15pc and 12pc in FY19 and FY20 respectively.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited.
