Demand, not input costs, key factor in picking stocks

By Sitaraman Shankar - Analysis

LONDON (Reuters) - Investors picking stock market winners and losers during hard economic times will find the ability to win orders during a global downturn more critical than how much companies profit from falling input costs.

Analysts say that food and some cement shares are set to outperform, while oil-intensive sectors like chemicals slide despite crude falling to $50 a barrel from $147 four months ago.

When demand falls off, lower oil is cold comfort: sectors such as chemicals are big losers because companies struggling to sell products draw little succour from lower costs.

But demand for food will stay relatively stable and grain prices have fallen sharply in recent months, underpinning food and beverage stocks, for which cheaper crude offers the additional bonus of lower packaging and transport costs.

"The stickiness of demand -- whether or not it stays as the economy slows -- is a very important factor, as it's going to drive earnings," said Mark Bon, fund manager at Canada Life.

"In the eventual analysis, demand is going to be bigger than costs as a driver for shares."

This is backed up by the performance of some companies that have managed to keep their heads above water through a downturn that has taken global equities down 47 percent this year.

Last month, the world's biggest foods group, Nestle (NESN.VX), posted nine-month underlying sales that beat forecasts and raised its full-year outlook.