UBS has reiterated its constructive stance on the European food and household and personal care (HPC) sector, citing a combination of modest valuation multiples, limited direct sales exposure to the Middle East and robust pricing power across many product categories.
The bank emphasized that companies in the sector face only about 3% of sales tied directly to the Middle East, a factor that contributes to more stable revenue profiles in the face of regional disruptions. UBS also highlighted that many firms in the segment have demonstrated an ability to pass on higher commodity costs to consumers, underpinning relatively defensive earnings visibility amid a backdrop of macroeconomic uncertainty.
UBS identified two names as its preferred picks within the group. Reckitt Benckiser is singled out as a stock that could see its valuation gap narrow. The broker noted the company's ongoing like-for-like sales growth and cited continued revenue momentum, category strength and the limited Middle East exposure as constructive elements. UBS also pointed to internal efficiency programmes and stepped-up marketing spend as potential drivers of improved earnings and greater visibility for the business.
Danone was highlighted for its positioning in health and wellness trends. UBS expects the company to benefit from market share gains and targeted category expansion, with specific emphasis on China’s infant milk formula segment, growth in medical nutrition and expansion in high-protein dairy offerings. The broker indicated that these dynamics, together with margin improvement, should support steady sales growth and overall performance for Danone.
That said, UBS flagged near-term risks for the sector. It pointed to consumer affordability pressures that could weigh on demand and to timing mismatches between input cost movements and companies' ability to reflect those costs in pricing. These factors could compress near-term margins or delay earnings improvements even where firms retain longer-term pricing power.
The broker’s view effectively frames the sector as relatively defensive in an uncertain macroeconomic environment, with selected companies positioned to benefit from category dynamics and operational improvements. UBS’s top picks reflect both valuation considerations and anticipated earnings resilience.
Key points
- Sector viewed as attractive due to low valuations, about 3% of sales exposure to the Middle East and pricing power to offset commodity cost inflation.
- Reckitt Benckiser and Danone named as UBS preferred stocks based on revenue momentum, category strength and targeted growth areas.
- Danone expected to benefit from market share gains in China’s infant milk formula, expansion in medical nutrition and high-protein dairy growth.
Risks
- Consumer affordability pressures could reduce demand in food and HPC categories, affecting revenue and margins.
- Timing mismatches between input cost increases and the ability to raise prices could compress near-term earnings.