The combination of the coronavirus creating fresh demand for cleaning products coupled with elevated equity market volatility is boosting the consumer staples sector, but investors may do well to not solely focus on domestic staples fare.
The Global X MSCI China Consumer Staples ETF (CHIS), which follows the MSCI China Consumer Staples 10/50 Index, is up more than 4% over the past week and is in the green year-to-date, proving the efficacy of the ex-US staples trade.
When it comes to sector ETFs, many investors solely focus on domestic offerings, but there are other ways to tap sector-level opportunities, including China ETFs. Investors considering China sector ETFs should note that there is likely to be dispersion among the various sectors, as is the case with domestic sector ETFs.
China’s Staples Footprint
Staples are extending a run of being sturdy amid the COVID-19 outbreak as the public seeks refuge within their homes, amid a haven of Clorox bleach, Coca-cola, and toilet paper. These are goods that will continue to be necessary regardless of the landscape, and some states are even mandating that stores remain open to sell them.
Obviously, those are American companies, but China has its own dominance in the consumer staples arena. The shift in buying habits in the world’s second-largest economy underscores the utility for tactical long-term investors.
“One area that exemplifies these changes is the non-discretionary component of Chinese consumer purchases,” said Global X analyst Chelse Rodstrom in a recent note. “Rather than depending on one’s own farm or on local markets for everyday food and goods, Chinese consumers are increasingly turning to stores for manufactured goods like snack foods, beverages, and home supplies.”
The consumer staples segment has long been viewed as a high-quality and defensive play. The slow and steady nature of the consumer staples business has long been touted as a safe play for all periods since consumers will still need to buy the basic necessities.
History, recent history at that, indicates CHIS is a valid play at times when the Chinese equity market is under macro stress.
“China’s Consumer Staples sector experienced rapid growth over the last decade as the economy and middle class expanded. The sector’s total market cap multiplied nearly 10x, from approximately $70 bn in 2010 to more than $700 bn by the end of 2019,” according to Rodstrom. “The sector, however, is still only a third of the size of its US counterpart, which stands at roughly $2.1 tn. In addition, Staples represents just 4% of the broad MSCI China Index whereas US Consumer Staples make up approximately 8% of the S&P 500.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.