ASX 200 consumer staples and consumer discretionary shares have dramatically diverged over the past month.
The S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) has fallen 9.16% while the S&P/ASX 200 Consumer Staples Index (ASX: XSJ) has demonstrated resilience, rising 0.59% over the past four weeks.
Broker Bell Potter says the pause in interest rate cuts amid potentially resurgent inflation has led to a sell-off in discretionary stocks.
However, the broker expects a change in momentum as we enter the pre-Christmas retail period.
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ASX 200 consumer staples vs. discretionary shares
Bell Direct market analyst, Sophia Mavridis said several factors had given consumer staples shares positive momentum in recent weeks.
They include dairy sector price inflation rising 2% year-over-year in September to an 18-month high.
There has also been sustained spending growth at Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL).
Weakness in the New Zealand dollar is providing a foreign exchange tailwind for A2 Milk Company Ltd (ASX: A2M), which is now the consumer staples sector's third largest business after 61% growth in its share price this year.
Looking ahead to the silly season, Mavridis said the consumer discretionary sector is "showing some encouraging signs".
She noted spending in non-food categories rose 5% year-over-year in September.
Additionally, the Westpac/Melbourne Institute Consumer Sentiment Index surged above its 100-point confidence baseline this month.
That's the first time it's gone above 100 since the interest rate tightening cycle began in May 2022.
The Consumer Sentiment Index rose 12.8% from 92.1 in October to 103.8 in November.
Westpac analyst Matthew Hassan said this is a seven-year high excluding the COVID period.
Mavridis said higher consumer confidence should be supportive in the upcoming trading season.
This includes Black Friday at the end of November and the pre-Christmas shopping spree in December.
Seasonality has prompted Bell Potter to change its key share picks in the ASX 200 consumer staples and discretionary sectors.
Bell Potter's top stock picks
In the consumer staples arena, Bell Potter is focused on market leaders.
The broker is positive on Woolworths shares, Endeavour Group Ltd (ASX: EDV), and Bega Cheese Ltd (ASX: BGA).
Bell Potter also has a buy rating on rural services and agribusiness Elders Ltd (ASX: ELD).
The Elders share price rose 8.61% to $7.57 last week after a strong FY25 report.
Bell Potter sees more growth ahead for Elders shares with a 12-month price target of $9.45.
In the discretionary sector, Bell Potter's high conviction picks include Harvey Norman Holdings Ltd (ASX: HVN).
Bell Potter also likes youth apparel retailer Universal Store Holdings Ltd (ASX: UNI) and footwear retailer Accent Group Ltd (ASX: AX1).
It also has a buy rating on Aristocrat Leisure Ltd (ASX: ALL) with a share price target of $80.
