On consumer staples, he likes those with a good selection of branded goods and an established history of product development. This includes groups such as Reckitt Benckiser and some of the tobacco companies. He likes the utilities sector because companies pay good dividends and the growth of that dividend is usually laid down by regulation.
Rising speculation
There has been speculation interest rate rises may derail many of these companies, because their reliable dividends and profits are less highly valued by markets. Clark believes any rise in interest rates will only be in response to a marked improvement in the UK economy, of which consumer spending is the largest chunk.
“Consumer spending is in good shape, probably stronger than the public data suggests. This is likely to continue this year and into 2016.”
“There will start to be rate rises over the next few months. Consumer staples will not be driven by what happens to interest rates, but by what happens to the economy. These are high return businesses and have sensitivity to the consumer economy. They will work through the rate rising period,” he adds.
Rate tightening is unlikely to happen quickly as it did in the early 1990s, but will be very gradual. “There simply isn’t inflation forcing rates higher,” he says. “As such, the damage will be very contained.”
He admits the performance of utilities may display a closer link to the bond market but says they still have high dividends and can anticipate dividend growth.
Fair value
In terms of valuations, he believes the consumer staples sector looks relatively highly priced but, crucially, that it is not excessive, and is a fair reflection of their growth prospects in a low-growth environment. Pharmaceuticals are generally cheaper but healthcare is a riskier business. For utilities, some are very cheap relative to their history.
He says: “Investors should remember that the past 10 years includes periods of very low valuation, such as after the global financial crisis, and therefore historical measures are perhaps misleading.”
