Staples is a defensive sector. It often outperforms at times of market stress because staples is seen as essential spending, which isn’t swayed too much by good or bad economic times. While in 2018, the sector is flat, the Australian share market (ASX 200) has lost more than 7%.

The sector includes the supermarket giants such as Coles and Woolworths, as well as growth names like A2M, TWE and BKL. All in all, this is a small sector with just 14 stocks.

What to look for in this sector

While this sector has traditionally been dominated by mature businesses, such as Coles and Woolworths, there’s a large number of smaller growth-oriented names such as A2M, SGC, TWE and BKL. The biggest companies in this sector are the supermarkets, which have already saturated the market and are facing increasing competition from offshore players. The intensifying competition is usually bad news for share price growth. In the area of growth, much of that growth is dependant on China, which is in the process of changing its e-commerce regulations.

Macro investing

Outside of the sector and company fundamentals, consumer staples tends to perform well late in the cycle and 2018 is no exception, with global consumer staples outperforming in the midst of increasing market volatility.

Favourite stock: ING

ING is the largest poultry producer in Australia and New Zealand and hence is in a good position to benefit from rising poultry consumption. About 50-60% of volumes come from supermarkets, which is a key risk for the company both due to ING seeing a strong portion of sales from supermarkets, as well as traditionally seeing strong growth through that channel. The recent drought has impacted on feed prices and it’s yet to be seen if price strength has been enough to offset the rising cost of feed. Margin improvement is coming from its cost efficiency program.