Here Are 7 Ways the Strait of Hormuz Closure Is Affecting Consumer Staples Stocks

Unfortunately, a prolonged closure or slowing of traffic through the Strait of Hormuz has ripple effects far beyond oil and gas prices. One corner of the market that deserves increased attention is consumer goods. The Strait of Hormuz, a narrow waterway that connects the Persian Gulf to the global economy, could have deep, severe, and often overlooked repercussions if closed for even a short period of time.

Here are seven reasons why a Strait of Hormuz closure could hammer consumer goods stocks and what long-term investors should expect.

No fertilizer, no inexpensive groceries

One-third of the world's fertilizer trade travels through the Strait of Hormuz. As we head into the growing season, this lack of available fertilizer will raise costs for farmers and, in turn, increase the prices of the foods they grow.

Higher food costs impact consumers directly, but for consumer staple stocks such as The Campbell's Company (NASDAQ: CPB) or General Mills (NYSE: GIS), higher ingredient costs could erode margins and profitability. These companies will have little choice but to pass costs on to consumers who are already feeling the crunch.

Plastics and polymers stopped in their tracks

For a moment, think about all the plastic packaging we are surrounded by. Plastic packaging is so ubiquitous that we forget that polyethylene, the world's most common thermoplastic used for packaging and containers, is often imported from the Middle East. In fact, 85% of the polyethylene exports from that region travel through the Strait of Hormuz.

A shortage of polyethylene will impact everything that comes in a plastic container. Consumer goods stocks such as Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) will feel the most pain from this potential shortage.

Image source: Getty Images.

Shipping costs skyrocket while margins disappear

Ships that need to be rerouted due to the Strait of Hormuz closure will take weeks longer to arrive at their intended destinations. The cost of shipping is then dramatically increased by fuel, insurance, freight rates, and lost time.

For consumer goods companies already operating with thin margins, this delay means immense pressure on the balance sheet. Companies can choose to pass that pressure onto consumers and risk hurting demand, or absorb the blow, which hurts margins. Either way, the results during the quarterly reports could hurt stocks.

Supply chain disruptions lead to shortages

Consumer goods companies often maintain lean inventory levels that are highly dependent upon smooth logistics. As global shipping times increase, that model doesn't work nearly as well, leading to empty shelves at stores.

Beyond the impact shortages have on real people, out-of-stock items mean lost revenue and lower quarterly earnings for businesses. Shareholders will want to buckle up for a bumpy ride the longer the closure continues.

Consumers stay home

As gas prices rise, consumers are forced to adjust their budgets, leading to a decrease in discretionary spending. As discretionary purchases decline, consumer goods companies selling non-essentials historically suffer the most.

A long closure of Hormuz, and businesses selling snacks, home goods, and apparel could certainly be hit hard.

Inflation returns with a vengeance

Increasing fuel costs drive up prices across the supply chain. This, in turn, results in an inflationary ripple effect across the broader economy. If inflation spikes, it wouldn't be surprising to see the Federal Reserve increase rates again. If borrowing costs rise, this is bad news for consumer goods companies, consumers, and stock valuations altogether.

Institutional investors rotate away

As retail investors play wait-and-see with geopolitical happenings, institutional investors are more likely to take decisive action. Large investors may rotate into other sectors and industries and away from consumer goods if the Strait of Hormuz is closed for any extended period of time. The selling of consumer goods stocks by institutional investors would send these stocks down sharply.

What should investors expect?

The longer the Strait is closed, the more consumer goods stocks could be negatively impacted. Consumer staples will likely hold up better than consumer discretionary in a prolonged closing, but it's hard to imagine either type would go unscathed.

Global shipping routes are critically important to the stability of our economy and markets. When the safe passage of those ships is disrupted for any amount of time, there are direct and indirect impacts on our money and the goods and services we purchase.

Investors should regularly review their asset allocation and ensure their portfolio aligns with their long-term goals before making any moves.

Catie Hogan has no position in any of the stocks mentioned. The Motley Fool recommends Campbell's and Unilever. The Motley Fool has a disclosure policy.