Templeton Global Investments (TGI) investment professionals are exploring the consumer staples sector for diversification opportunities, given its reasonable valuations, attractive yield and earnings recovery potential.
These compelling characteristics are driving recent gains, in contrast to the sector’s underperformance over much of the past decade. The MSCI AC World Consumer Staples Index delivered three-month gross returns of 7.6%, ahead of the MSCI ACWI’s return of 4.1%.1
Reasonable valuations and defensive profile
We look beyond the near-term performance and focus on relative valuations. A comparison of price-earnings (P/E) ratios between the sector and the MSCI ACWI shows that the relative multiple of consumer staples is near its lowest in 10 years (Exhibit 1). In our view, this implies the consumer staples sector offers undemanding valuations, with limited downside going forward. There is potential for re-rating, dependent on the outlook for earnings recovery.
Exhibit 1: Consumer Staples Relative Valuation Has Potentially Bottomed
Relative P/E: MSCI ACWI Consumer Staples vs MSCI ACWI
Source: Bloomberg. As of February 25, 2025.
Against this backdrop, several TGI strategies are selectively increasing their consumer staples exposure for portfolio diversification. This coincides with an ongoing market rotation from technology stocks to more defensive sectors, amid fears of overstretched technology valuations and the social-economic disruption of artificial intelligence (AI).
We think consumer staples are well aligned with this defensive consideration for three reasons:
- Resilient demand: Consumer demand for staples products is generally considered “evergreen” and non-cyclical. The industry is also relatively invulnerable to AI disruption. This in turn should support stable cash flows and revenue generation.
- Attractive yield: Benefitting from its ability to generate cash, the consumer staples sector tends to offer more attractive dividend yields, providing a source of downside protection to shareholder returns. The sector has a dividend yield of 2.7%, ahead of the dividend yields of the MSCI ACWI at 1.6% and the MSCI USA Index at 1.2%.2
- A weaker US dollar (USD): The USD weakening may prove favourable for global staples companies with substantial emerging market presence. In this context, the easing of economic headwinds in key markets such as India and Mexico is another potential tailwind.
A selective and patient approach
As we consider increasing our portfolio exposure to consumer staples, our stock selection focus is on companies positioned for profitability and earnings recovery. This may entail an assessment of ongoing restructuring initiatives to streamline businesses and optimize cost structures.
For instance, we believe one of our favourite sector ideas—a global name with products spanning wellness, personal care and nutrition—is progressing well in a restructuring program that includes asset spinoffs and cost cutting. The result has been a clear improvement in its gross margin and return on invested capital (ROIC).
We are also encouraged by the restructuring program now starting at another US food and beverage giant. Initiatives such as reducing prices to stimulate sales growth, boosting product innovations in response to rising consumer demand for healthier choices, and aggressive cost-cutting should pave the way for stronger earnings power, margin expansion and ultimately shareholder value, in our view.
While our research radar has caught a number of compelling opportunities, we keep in mind the risks of poor execution, dividend cuts and unmet earnings expectations. Investor hopes for a bottoming-out of consumer staples earnings have visibly increased, but the sector is still in the process of multi-year restructurings and an unprecedented number of CEO changes. Revenue-boosting measures such as product innovations and price investments will also take time to bear fruit. Earnings inflections will not immediately and universally play out in the sector, in our view, necessitating a selective and patient approach.
At the same time, we will continue to study the fluid US tariff situation. In general, consumer staples companies face a lower first-order tariff impact, as they tend to produce where their goods are sold. However, second-order effects, such as another round of broad-based US tariffs that drive up inflation again, may hit consumer demand, hurting staples companies on both volumes and pricing.
Market at a glance
Review: February 2026
Global equities rose modestly during February 2026. Market leadership broadened over the course of the month, with value stocks outperforming growth and smaller-capitalization companies advancing well ahead of large caps. Earnings season remained central to price action, particularly around AI-related capital expenditure, monetization timelines, and the growing distinction between beneficiaries and potential disruptees. This dynamic weighed on parts of the mega-cap growth complex and encouraged reallocation toward more cyclical and domestically oriented segments. Trade policy uncertainty resurfaced late in the month following a US Supreme Court ruling on prior tariffs and the subsequent introduction of a temporary global tariff framework, adding volatility but reinforcing rotation toward areas perceived as offering nearer-term cash flow visibility and relative insulation from policy risk.
Investment outlook
Should the recent trend of US dollar weakening persist, this would reinforce the case for further diversification away from US assets; conversely, a change in direction would warrant a more defensive response. In Asia Pacific, we are positive on Japan’s recent election outcome. The Sanae Takaichi government is poised to maintain its pro-growth policies, strengthening the tailwinds from Japan’s economic normalization. The Asia ex-Japan earnings outlook also remains healthy, with 11% growth expected for 2025 and 29% for 2026.3 European equities stand on firmer footing in 2026. Structural reform momentum, German fiscal support and coordinated defence investment point to stronger medium-term growth. While returns may moderate after a robust 2025, policy progress and improving fundamentals support a constructive outlook.
EndNotes
- Source: MSCI. As of January 2026. The MSCI ACWI captures large- and mid-cap representation across 23 developed market and 24 emerging market countries. The MSCI ACWI Consumer Staples Index is a sub-index of the MSCI ACWI. All securities in the index are classified in Consumer Staples as per the Global Industry Classification Standard (GICS®). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. <strong>Past performance is not an indicator or a guarantee of future results.
- Source: MSCI. As of January 2026. The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the US market. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. <strong>Past performance is not an indicator or a guarantee of future results.
- Source: Goldman Sachs, Asia-Pacific Weekly Kickstart. February 13, 2026. There is no assurance that any estimate, forecast or projection will be realized.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that a multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Large-capitalization stocks may fall out of favor with investors based on market and economic conditions.
Diversification does not guarantee a profit or protect against a loss.
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