Balancing Counter-Cyclical Consumers with Pro-Cyclical Asset Allocation
The consumption sector as a whole has gradually weakened in the fourth quarter of 2023, with the food and beverage industry being one of the sectors from which public funds have reduced their holdings significantly during this period. From a fundamental perspective, most sub-sectors of consumption have shown signs of weakness in demand entering the fourth quarter of 2023. However, there was a marginal improvement in the first quarter of 2024 due to the misalignment of the Spring Festival, with the manufacturing PMI in January at 49.2%, a month-on-month increase of 0.2%.
At present, there are no upward turn signals in the fundamentals of most sub-sectors within consumption, but after several years of declining growth rates, the industry is likely to maintain the compound growth rate seen in recent years through 2024. Additionally, the current market environment exhibits low risk appetite, leading to a rapid increase in demand for safe-haven assets. Consequently, significant differentiation among various sub-sectors within the industry is evident.
If we classify the food and beverage industry based on its correlation with the macro economy, it can be divided into pro-cyclical and counter-cyclical categories.
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Among them, the sub-sectors exhibiting stronger pro-cyclical attributes include liquor, restaurant supply chain, premium beer, and high-end dairy products. In contrast, those with stronger counter-cyclical attributes comprise basic dairy products, meat products, soft drinks, and mass-market beer. Notably, mature sub-sectors like dairy and meat products tend to have relatively high dividend payout ratios among leading companies.
1. Under the current market environment, the demand for allocation in counter-cyclical sectors may increase.
In the current market environment, investors may enhance their allocation to counter-cyclical sectors based on risk aversion. Moreover, companies within counter-cyclical sectors that are in their maturity phase tend to exhibit low growth rates, relatively low absolute valuations, and high dividend yields, thus offering certain defensive characteristics. Typical examples include meat and dairy products, where leading companies report dividend yields exceeding 4% and have achieved notable excess returns since the first quarter of this year.
Alongside counter-cyclical attributes, there are also some companies that are somewhat independent of the macro economy and market styles, which present investment opportunities. On one hand, attention can be paid to cost improvement logic. In 2024, the costs of commodities such as sunflower seeds, molasses, and soybean meal are on a downward trend, and assuming there are no significant issues on the revenue side, it is expected that this may result in higher profit elasticity for the corresponding companies. On the other hand, focusing on reform logic can be beneficial, as certain companies have undergone significant management changes, presenting ample opportunities for reform catalysts in the future.
2. Investment opportunities in pro-cyclical sectors.
Opportunities for investment in pro-cyclical sectors primarily manifest in several aspects: 1. Valuations are at lower levels, with a high degree of alignment to potential real income growth rates, thereby exhibiting attractive returns. 2. The implementation of effective economic stimulus policies may help rebound macroeconomic sentiments, subsequently invigorating downstream consumption. 3. A moderate economic recovery is anticipated, gradually restoring demand across various consumption segments.
The core representative of the pro-cyclical sector is liquor, with the market currently holding a rather pessimistic view of the liquor industry. Historically, there have been two significant cycles in the liquor market since 2000: the period from 2002 to 2012 is known as the "golden decade," followed by a three-year downturn from 2012 to 2015; subsequently, from 2016 to 2021, the second prosperous cycle occurred, before entering a downturn in the second half of 2021. During these prosperous periods, adjustments were noted in 2008 and 2018.
In terms of valuation decline, the maximum pullback of the sector's valuation reached 58% during the downturn from 2012 to 2015; excluding leading companies, the maximum decline in valuation reached 56%. Currently, during this downturn, the maximum pullback in valuation has reached 58%, and excluding leading companies, this pullback has soared to 68%, evidently surpassing the valuation adjustment of the sector during the 2012-2015 downturn.
Other pro-cyclical sub-sectors, such as the restaurant supply chain, continue to show promise despite the dining industry's downturn. The industry is undergoing industrialization, and the pre-prepared meal segment is expected to maintain its vitality for a considerable duration. Since the restaurant supply chain is cost-oriented and still experiencing rising industry concentration, we anticipate that leading companies in this sector may sustain relatively good growth in the coming years. Moreover, valuations in this area have also undergone significant adjustments and are beginning to show potential for gradual investment.
3. Conclusion.
In summary, against a backdrop where the fundamentals of the consumer sector have yet to show a clear upward turning point, the market demonstrates a strong demand for allocation towards counter-cyclical industries. Mature companies within this sector, characterized by weak correlations with overall economic performance, low absolute valuations, and high dividend rates, indeed exhibit considerable attractiveness. Meanwhile, while overall demand in pro-cyclical sectors remains relatively weak, certain leading companies have already experienced substantial valuation corrections, resulting in a favorable alignment of current valuations with potential real performance growth. Looking ahead to the next three years, there is potential for noticeable capital returns, indicating that share prices may have entered a favorable accumulation zone.
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