While the UK economy is going from strength to strength, the Chinese economy has stalled in recent months. Although it is still growing by over 7% per annum, the soft landing that had been rumoured for a number of years has occurred and, as such, it seems likely that the Chinese authorities will continue to cut interest rates as they seek to stimulate economic growth.
This is good news for emerging markets-focused companies such as Unilever (LSE: ULVR) and SABMiller (LSE: SAB) since it could mean that they receive a sales boost. In fact, in its last quarter, SABMiller reported that there had been a pickup in China and, with Unilever relying on the emerging world for around 60% of its total sales, a pickup in the largest emerging market of them all (China) would be great news.
Certainly, both stocks trade on vast premiums to the wider index, but their long term growth rates, stability, product diversity and track records mean that they appear to be well-worth the additional cost. So, while Unilever and SABMiller may appear expensive on price to earnings (P/E) ratios of 21.8 and 22.6 while the FTSE 100 has a P/E ratio of 16, their shares could continue to beat the wider index as they have done in the last year.
UK-Focused
Of course, there are excellent opportunities in the UK-focused consumer sector. For example, the gradual movement of consumers towards the so-called internet of things seems to make Dixons Carphone (LSE: DC) a very appealing long term investment. It is expected to increase its earnings by 16% in the current year, and by a further 10% next year and, while it trades on a P/E ratio of 17 (which is higher than that of the FTSE 100), its price to earnings growth (PEG) ratio, which takes into account its strong growth rate, indicates greater appeal since it is just 1.
Similarly, Marks & Spencer (LSE: MKS) is also expected to improve its growth rate in the next two years, with annualised growth of 8% being forecast. This is a marked improvement on previous years and would be the best performance by the retailer since prior to the start of the credit crunch. And, with its shares still having a forward yield of 3.5%, Marks & Spencer offers excellent income potential, too.
However, on this front it is easily beaten by convenience store operator, McColls (LSE: MCLS). It currently yields a whopping 5.9% and, with shoppers gradually moving away from large, out-of-town shopping centres and towards smaller, convenience stores, its long term growth profile appears to be very enticing. And, with McColls trading on a P/E ratio of just 10.7, it remains dirt cheap and has the potential to post impressive capital gains.
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Peter Stephens owns shares in Unilever and Marks & Spencer. The Motley Fool owns shares in Unilever.
