We’re already seeing that consumer confidence has lowered and analysts have been lowering expectations for 2019
For the wealthy it was watching the stock market go down 15%... for government workers, it was weeks of no cash flow and uncertainty Shawn Kravetz, Chief investment officer at Esplanade Capital
new york — With expectations for slowing growth escalating, US 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 US unemployment and rising wages should point to a healthy consumer, but worries about global growth, domestic politics and a USChina trade war have been wearing on consumer and investor moods.
Wall Street expects fourth-quarter earnings growth of 14.7 per cent for the S&P 500’s consumer discretionary index — below the 17.8 per cent consensus from October at the beginning of the fourth quarter, according to data from Refinitiv as of Friday morning.
And for the first quarter, analysts expect discretionary earnings to fall 1.7 per cent, compared with expectations for 6 per cent growth on October 1.
For consumer staples, fourthquarter earnings are expected to grow 4.2 per cent, down from the 6.7 per cent consensus in October, with 0.7 per cent growth expected for the first quarter.
In comparison, the broader S&P benchmark is expected to report fourth-quarter earnings growth of 16.8 per cent and decline 0.1 per cent in the first quarter.
“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 US Bank Wealth Management in Minneapolis. His firm is “market weight to slightly underweight” on consumer discretionary while it views consumer staples valuations as “fair to slightly over valued”.
US 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’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 per cent 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 S&P, 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 and General Motors but is underweight the broader discretionary and staples sectors.
Companies that have yet to report their earnings include CocaCola, PepsiCo, Newell Brands , and Walmart, which fit into the staples category, while discretionary companies that have yet to report include retailers such as Home Depot, Macy’s, Gap 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, 71 per cent of consumer discretionary firms have beat Wall Street’s fourth-quarter earnings expectations. —