For Subscribers

Get the complete article now!

TWST: Looking forward, then, is the positive impact of those two drivers weakening? What’s on the horizon for the next 12-18 months?

Mr. Parker: Yes, I think they are weakening. If you look at the input cost picture, it’s unlikely that the commodity prices which fell dramatically last year, things like edible oils, cocoa, coffee, are going to fall again by the same amount in 2001. Coffee, for example, is at a 30-year low. So even if they stay on the bottom, it’s going to be a less favourable environment than it was when they were actually falling. Ultimately I’m not a forecaster of commodity prices, but my best guess at this point is that they won’t be quite so favourable. If you look at the consumer environment around the globe, clearly the US is slowing quite markedly, and that would be the main area of concern. But equally you’re not going to see a further benefit from the emerging markets recoveries, in Eastern Europe and Asia in particular, that we saw last year, and indeed one or two emerging markets are showing signs of beginning to go the other way. So I think on both those factors, the outlook isn’t quite so good.

TWST: What sort of corporate activity do you expect in this sector?

Mr. Parker: Clearly the feature of the last twelve months has been the companies I follow purchasing in the USA. Nestlé bought Ralston, Unilever (LSE:ULVR.L) bought Best Foods, Cadbury’s (LSE:CBRY.L) bought Snapple, Numico bought Rexall Sundown. There’s been an absolute tidal wave of the European companies buying into the US. I suspect we’re coming to the end of that, because the big companies have all made their moves and picked off those businesses which they found most attractive. So I think we’re probably going to see less of this activity in 2001.

TWST: Where is the sector currently in terms of valuation?

Mr. Parker: It’s at around the long-term relative valuation against the market, of a discount to the market of about 5%.

TWST: What are you advising your clients currently as regards the positioning of their portfolios in this sector? Should they be overweight, underweight, or neutral?

Mr. Parker: I’m advising an underweight position mainly because of the factors we discussed earlier concerning the earnings outlook. I think people have become a little over-optimistic about the potential for margin enhancement in 2001 and I would be at the low-end on forecasts. I think the risk of disappointment is greater than the market consensus is discounting. Against that background, you have the very good performance that we saw last year in these stocks, which suggests down side risk on any earnings disappointments during 2001. In addition, a major driver of food stock performance is what is happening elsewhere, and certainly the strategic view of Deutsche Bank is that defensives are not going to perform well, with US interest rates coming down, and I feel very comfortable with that judgement. It gels with my own view based on the more micro factors related to the food sector, so we’re recommending that people move underweight in the sector.