INSUBCONTINENT EXCLUSIVE:
With expectations for slowing growth escalating, United States fund managers are selectively avoiding stocks in consumer companies as lofty
valuations, concerns about declining earnings estimates, and consumer confidence keep them on guard.
Low United States unemployment and
rising wages should point to a healthy consumer, but worries about global growth, domestic United States politics and a United States
-China trade war have been wearing on consumer and investor moods.
Wall Street expects fourth-quarter earnings growth of 14.5 percent for
the SP 500's consumer discretionary index - below the 17.8 percent consensus from October at the beginning of the fourth quarter,
according to data from Refinitiv.
And for the first quarter, analysts expect discretionary earnings to fall 1.4 percent, compared with
expectations for 6 percent growth on Oct
1.
For consumer staples, fourth-quarter earnings are expected to grow 4.5 percent, down from the 6.7 percent consensus in October, and are
expected to shrink to 0.9 percent growth for the first quarter.
In comparison, the broader SP benchmark is expected to report fourth-quarter
earnings growth of 16.2 percent and first-quarter growth of 0.1 percent.
"Our thoughts on the global consumer is that the marginal data
points coming in are more negative than positive," said Eric Freedman, Chief Investment Officer at United States Bank Wealth Management in
His firm is "market weight to slightly underweight" on consumer discretionary while it views consumer staples valuations as "fair to
slightly over valued."
U.S consumer confidence fell to a 1-1/2 year-low in January as a partial shutdown of the government and financial
markets turmoil left households nervous, according to a Conference Board survey.
Shawn Kravetz, Esplanade Capital LLC's chief investment
officer, said while the "consumer remains generally robust, most people have had something in their life in the past few months that has
given them pause."
"For the wealthy it was watching the stock market go down 15 percent in the fourth quarter," Kravetz said
"For government workers, it was weeks of no cash flow and uncertainty
For many it was the uncertainty of the shutdown and what the secondary effects might be to them directly, to their jobs or businesses, or
the economy at large everyone was touched directly or indirectly
That didn't pop the bubble but certainly let a little air out."
Like other investors, Kravetz is largely avoiding consumer stocks because of
their valuations.
The consumer discretionary index trades at roughly 19.8 times forward earnings estimates compared with 17.3 for consumer
staples and a 15.8 multiple for the broader SP, according to Refinitiv data.
"You're paying more for less growth," said Burns McKinney, a
portfolio manager at Allianz Global Investors in Dallas
His firm holds stocks in consumer companies including Target Corp and General Motors but is underweight the broader discretionary and
staples sectors.
Companies that have yet to report their earnings include Coca-Cola Co, PepsiCo Inc, Newell Brands Inc , and Walmart Inc,
which fit into the staples category, while discretionary companies that have yet to report include retailers such as Home Depot Inc, Macy's
Inc , Gap Inc and Target.
"The big retailers like Walmart are fairly valued with solid expectations but also with some risks," Kravetz said
"The brands like Coca-Cola and Pepsi are mostly near their highs as safety in storms but with enough risks to keep us away
The stores like Macy's and Gap are challenged."
Jharonne Martis, director of consumer research at Refinitiv, said retail growth is still
healthy, but because growth was "significantly stronger" earlier in 2018, "some of the stocks could be punished" when retailers report
earnings.
"We're already seeing that consumer confidence has lowered and analysts have been lowering expectations for 2019," said Martis.
So
far, 72 percent of consumer discretionary firms have beat Wall Street's fourth-quarter earnings expectations, with almost half of the
About 62 percent of staples companies have beat estimates, with reports out from more than half of the sector, according to data from
Refinitiv.
A major challenge to first-quarter numbers for consumer companies was the 35-day partial United States government shutdown, when
hundreds of thousands of federal workers went without paychecks.
In a recent Reuters poll a majority of economists saw the shutdown having a
significant impact on first quarter gross domestic product growth, with the median expectation for a 0.3 percentage point trim.
On top of
this, a late-2018 equity market sell-off, which sliced 19.8 percent of the SP 500 between Sept
24, also scared consumers, according to Morgan Stanley.
