As detailed in the November monitor updates and In Focus notes from Ben, we have observed some evidence of what we believe is a more significant transition from inflation as the dominant narrative influencing financial markets to narratives of (1) recessionary fears and (2) tariffs and trade, especially vis-à-vis China. As the latter, in particular, emerges into common knowledge, we expect that 2019 “outlook” commentary and sell-side chatter will reinforce predictions and advice that are mostly about avoiding exposure to those risks.
We have been clear about our game theoretic view of predicting the outcome of the China trade war: We think it is a chicken fight which provides practically no ability to assign odds. Still, regardless of any fundamental impact from the outcome, the narrative shift remains meaningful to asset prices. In our view, rather than attempting to predict those outcomes, investors may benefit from considering companies, sectors and assets which would benefit from reduced attention to inflation and growth narratives. The most obvious candidates in our minds are brand-oriented consumer stocks, and staples in particular. These are companies for which rising costs have been an increasing, nearly universal concern. They are also stocks for which narratives about the Death of Brands have been gnawing at growth-hungry investors for some time. They are also stocks which, despite an increasingly difficult environment for stocks in 2018, have not delivered on their historical defensive traits.
To explore this further, we constructed a universe of nine large cap brand-oriented, primarily staples companies with consistently robust media and research coverage over the last four years. General Mills, Altria, Kimberly-Clark, Kraft Heinz, Clorox, Procter & Gamble, PepsiCo, Coca-Cola and Colgate-Palmolive comprise this universe. Indexing to 2015 coverage as a baseline, we measured the proportion of stories and research about each of the nine companies which focused on inflation or rising costs on the one hand, and which focused on slowing growth on the other.
In the aggregate for this group, discussion of inflation fears and slowing growth across all forms of published content has increased in each of the last four calendar years. The frequency of rising cost discussions has been 45% higher in 2018 than in 2015, while discussions of slowing growth have been 37% more common. Each phenomenon has varied in its impact on different companies within the universe. Costs-related commentary, for example, has risen dramatically for General Mills and Clorox, but has remained moderate for Procter & Gamble and Colgate-Palmolive.
Slowing growth language has increased even more broadly across the group.
Company-Specific Cases – General Mills
The clearest example of how this narrative has manifested is General Mills. The exhibit below covers the full period of 2018 (through December 19th). In general, this is a stock for which the most central narrative clusters are typically stability, quality, value or dividends. From time to time, of course, there may be news about a brand, a channel, a marketing initiative or some other material detail, but these rarely play a central role in the narrative for the company.
In 2018, this has changed.
This year, the strongest, highest attention, most central topics for General Mills were consistently related to input costs, food costs and freight costs (see the top two boxes in the narrative map below). The distinguishing trait of the other most central topics was an emphasis on either struggling brands (in this case, Yoplait) or actions taken to promote inorganic growth. While the usual suspects of value, quality, defensiveness and dividends have still been there in the background, the research, media and content investors are consuming when they review GIS are all about rising costs and slowing growth. Even published sell-side research, which usually pays a bit more mind to the traditional rationale for holding the stock, is clustered and positioned in the dead center of these topics.
Company-Specific Cases – Altria
The 2018 narrative of Altria, on the other hand, serves as an example of staples companies that have been less impacted by the influence of rising costs, and more by slowing growth across products. The significant drop in Altria share price has meant that “value” language commentary has remained alive and well for the company as one of the highest attention and interconnected nodes. But this emphasis is belied by the overwhelming topical emphasis elsewhere in the narrative structure, which is almost universally dedicated to competitive pressures and other matters limiting the attractiveness of Altria’s attempts to replace lost growth. The most central and most interconnected clusters of the Altria narrative are discussions of e-cigs and a resurgence in regulatory pressure that began in 2017.
Taken in context of a surprisingly intense focus in media – and even on the sell-side – on cannabis-related topics, we would characterize the 2018 Altria narrative as: “this company can’t grow, it’s getting competed and regulated out of its core businesses, and has in cannabis an emerging substitute where it is behind the curve.” If there is doubt that this has weighed on the company (and its management), you need only read the discussions within the recent reports of Altria’s significant acquisition of the equity in Juul Labs. Alternatively, you might consider the decision of equally beleaguered brewing companies to publicize potential cannabis-related collaborations.
As frequent readers will know, we are not in the business of publishing fundamental views. We do not know whether companies like Altria or General Mills will be successful in proving these narratives right or wrong, and readers should incorporate their own judgments on those points. We do, however, think that there are better-than-even odds that the shifting attention of market participants from growth and inflation narratives will relax the pressure on many brand-oriented stocks with cost, brand and growth issues.
For those conducting fundamental, trend- and sentiment-based analysis of these companies and the staples sector more broadly, we advise awareness of these changing narratives.
PDF Download: Twilight of the (Consumer) Goods?