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The 'bond proxies' – love 'em or hate 'em?

Wednesday, October 12, 2016 22:11
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Whilst supermarket shareholders took a bath in 2013/2014, investors in branded consumable goods maker Unilever have doubled their money in the last five years.  Depressed margins from fierce competition have been widely blamed for the poor performance of the likes of Tesco.  Yet blue chip consumer non-cyclical companies – investments people are calling “bond proxies” in a word of 0% rates – just don’t appear to be affected.  Unilever, and companies like it, trade on 25 times gross earnings, much like ‘bricks and mortar’ in London and way higher than the

Given that the Lidl and Aldi sell very little branded produce, and consumers are switching to them in droves, it always struck me branded goods companys’ margins would be next in line for a haircut.  So it comes as little surprise that troubled retailer Tesco have fallen out with the maker of Marmite:

“Reports suggest that Unilever … has demanded steep price increases of around 10 per cent to offset the increased costs [from the fall in sterling] … Products have disappeared from Tesco’s website after the supermarket chain refused to accept the price increase …”

Now if everyone refuses to accept the new price, and simply substitutes Colman’s for a supermarket English mustard on their shelves – on sale at a third of the cost or less – how does this help Unilever?

Of course another reason the likes of Unilever became a darling stock of the big fund managers was the fall in the price of oil.  If consumers are spending less at the pumps they can afford more branded ice creams went the thesis.  With petrol prices in pounds on the up again the reverse must be true surely?

So do we dare sell short the ‘bond proxies’ or are they really going to the moon in a world of negative interest rates and fed up savers?

NOTE: This is a not financial advise or a solicitation to buy or sell securities but an article for academic interest and discussion.


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