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Costco is adding more stores across North America with 11 opening between May and August.DARRYL DYCK/The Canadian Press

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Investors looking for reliability and the ability to weather market turmoil are attracted to the consumer staples sector, but companies with limited inflationary exposure that can also withstand an economic downturn are the most promising, experts say.

Fears of economic recession, rising interest rates, price pressures, and geopolitical risks have contributed to market volatility, causing investors to become more risk-averse. Historically and now, that has driven them to the dependability of consumer staples.

“Investors want to be in more stable companies that have the ability to generate earnings, no matter the economic environment,” says Bruce Campbell, founder and portfolio manager at StoneCastle Investment Management Inc. in Kelowna, B.C., adding there are some names that are “recession-proof.”

As such, Barry Schwartz, executive vice president and chief investment officer at Baskin Wealth Management in Toronto, likes Costco Wholesale Corp. COST-Q because it offers multiple consumer staples, generally at an affordable price due to bulk buying, and it’s in growth mode. The company is adding more stores across North America with 11 opening between May and August.

Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group Ltd. in Oakville, Ont., says the firm holds two consumer staples names in its Harvest Brand Leaders Plus Fund Income ETF HBF-T.

One is Proctor & Gamble Co. PG-N, which produces toothpaste, diapers, and other household necessities. “They’ve been able to pass [their prices] through and not have a lot of inflationary exposure by the nature of their products being a consumer good,” he says.

The ETF also includes PepsiCo Inc. PEP-Q, which has been able to navigate market cycles successfully.

Other areas that portfolio managers are looking at is the divide between the consumer staples and consumer discretionary sectors.

Mr. Campbell says that while Canadian Tire Corp. CTC-A-T is considered more discretionary, it has invested in businesses that could be considered staples.

For example, during COVID-19, more people got pets during the lockdowns, and Canadian Tire has moved into that space.

“They’re selling pet supplies in a bigger way than they ever have in the past,” he says. “We know that business is as close to recession-proof as possible because most people are going to look after their pets.”

Companies that did well in this space were food-related like Loblaws Inc. L-T and Metro Inc. MRU-T, because people need to eat, so that’s where investors gravitated toward, says Mr. Campbell.

They’ve also been able to pass on price increases or product size changes to customers without much complaint. However, the grocery stores could face additional pressures due to competition and the current climate.

Mr. Schwartz says the time to invest in grocery stores was two years ago because they’re now facing slower growth with the arrival of more stores from Costco, Walmart Inc. WMT-N and independent stores.

Opportunities in the substitution effect

In addition, as prices increase, consumers looking to get the most out of their money could turn away from grocery stores and to places that offer cheaper goods.

Mr. Campbell says the substitution effect could kick in with some people switching from brand to no-name products, while others won’t necessarily switch from their favourite brands, but they will start to comparison shop.

If the economy slows down, prices increase and wages don’t catch up, that provides another opportunity for investors. Dollar stores could become more attractive.

“Those don’t necessarily fall into the staples category,” Mr. Campbell says. “But if you look at something like a Dollarama – instead of people buying at the grocery store, they might go to the dollar store where they can get the same product cheaper.”

Overall, while it’s good to have consumer staples in a diversified portfolio, investors need to make sure their position size is held in check in case the market turns, growth slows in the sector, and capital starts flowing into more discretionary items. That’s already happening with the recent uptick in both leisure and business travel.

“Right now, you want to have a position in [the consumer staples] area,” Mr. Campbell says. “[But] you don’t want that [position] to get so big that if the money starts to flow out of the sector, it’s going to be a big drag on your portfolio.”

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