World markets enjoying December ‘Santa surge’

Investors in the world’s major drinks companies have seen their share holdings grow strongly in 2016.

In general world markets have risen and are now enjoying a December “Santa surge”.

While it is always arbitrary at best to base any financial decisions on a fixed calendar period, performance over 12 months can give indications of overall trends, which in the case of the wine and spirits sectors this year have been largely positive.

It has been a turbulent year on financial markets, spurred by surprises such Britain’s vote to leave the EU and the consequent slump in sterling and the election of Donald Trump as the incoming US president.

In general, however, world markets have risen and are now enjoying a December “Santa surge”. At the time of writing, the star performers are London and Wall Street, which are 12.5% and 13% respectively above where they stood on New Year’s Day. Frankfurt is about 4.5% ahead, Paris 3.9% up and Tokyo virtually unchanged.

Yet in many cases the major drinks companies have beaten or at least matched the performance of markets on which they are quoted.

Diageo’s shares have put on nearly 14.5%, much of that jump being due to the post-Brexit devaluation of the pound. America accounts for about two fifths of Diageo’s sales, so its dollar earnings will show a significant surge when it announces its half-year results in late January.

But Diageo’s shares were on a firm upward trend well before June 23. There is a wide consensus that chief executive Ivan Menezes is steering the drinks giant into calmer and more profitable waters. Most London brokers remain positive about the shares.

Despite rising by some 10% by October, Pernod Ricard’s shares will end the year virtually unchanged, but that is an encouraging performance in comparison to the broader average of European drinks stocks, which has fallen by about 7% so far in 2016.

Again, there is broad confidence that Pernod Ricard is addressing its problems in China and with brands such as Absolut in the US. The company predicts further solid profits growth in its current financial year, while the recent sale of the Domecq stable of Sherries and spirits and purchase of craft bourbon house Smooth Amber strengthens the longer term balance of its portfolio, especially in the crucial US market.

Rival French group Rémy Cointreau has been the outstanding performer of 2016, its shares soaring by 20% so far. Critics will rightly point out that Rémy’s fortunes were harder hit than any others when China brought in its austerity and anti-gifting drive three year ago; simply the shares had much better scope to recover.

But Rémy’s latest figures show a significant recovery of its Cognac sales in China, where it leads the market, and most analysts recommend that shareholders hang on to the stock in the expectation of further improvement in 2017.

In Milan, Davide Campari has easily beaten its home market index, rising by more than 15% since last Christmas, based on the stronger global reach of its burgeoning portfolio, especially Wild Turkey, and the greater dollar earnings brought in by the continuing weak euro. Again, analysts are sounding positive.

On Wall Street, however, there is more caution about the two international drinks companies quoted on the market.

Constellation Brands has been a stellar performer in the two years since it landed Mexican beer giant Groupo Modelo. The growing trend toward Mexican beers in the US, especially Corona, and the burgeoning latino demographics in the US market have transformed Constellation’s performance. Indeed, the shares have gained 10%.

Rémy’s latest figures show a significant recovery of its Cognac sales in China

But there are anxieties that Constellation will not be able to maintain the pace. It needs a little time to consolidate its changed identity into a beer giant, especially as investors have anxieties about US relations with Mexico following the inauguration of President Trump next month. Indeed, since his election in November the shares have fallen by about 10%.

Investors are saying to Constellation: “Thanks for the very profitable ride; let’s jump off, take our profits and look for more excitement elsewhere”.

Meanwhile, Brown Forman has under performed this year, its shares falling by about 11% despite being almost 20% ahead at Easter.

Brown Forman is restructuring its portfolio, having sold Southern Comfort to Sazerac. But its latest results show disappointing trends in markets such as Canada, the US, Britain, Russia and Germany, all recording negative net sales growth. And while some investors take comfort in the company’s history of always paying dividends for the past 70-odd years, many are voting with their feet.

Indeed, there are mutterings that were it not for the protection that the split share structure gives to the company (most shareholders have no voting rights), it would be a prime takeover target.