US fund managers prepare for slowing consumption

Sinéad Carew

(Reuters) – In response to the expected growth slowdown, US fund managers selectively shy away from consumer stocks, such as high valuations, worries about declining earnings expectations and confidence consumers.

The low unemployment rate and rising wages in the United States should signal a healthy consumer, but worries over global growth, US domestic policy and a US-China trade war are weighing on the economy. Mood of consumers and investors.

Wall Street expects earnings growth of 14.7% in the fourth quarter for the S & P 500's consumer discretionary index, which is below the consensus of 17.8%. October at the beginning of the fourth quarter, according to Refinitiv data released Friday morning.

And for the first quarter, badysts expect a 1.7% decline in discretionary earnings, compared to a 6% growth expected October 1st.

As for consumer staples, fourth-quarter profits are expected to grow 4.2%, down from the consensus of 6.7% in October, with expected growth of 0.7% for the first quarter.

In comparison, S & P's broader benchmark is expected to post earnings growth of 16.8% in the fourth quarter and a 0.1% decline in the first quarter.

"Our view of the global consumer is that the incoming marginal data points are more negative than positive," said Eric Freedman, chief investment officer of Wealth Management's US bank in Minneapolis. His company "slightly weighted the weight of the market" on consumer discretionary, while considering that valuations of consumer staples are "fair to slightly overvalued".

According to a Conference Board survey, US consumer confidence reached its lowest level in a year and a half in January, following a partial government shutdown and turmoil in financial markets.

Shawn Kravetz, chief investment officer of Esplanade Capital LLC, said, "The consumer remains generally robust, but most people have had something that has given them a break in recent months."

"For the rich, he watched the stock market fall by 15% in the fourth quarter," Kravetz said. "For civil servants, it was weeks without cash and uncertainty. For many, it was the uncertainty of closure and the side effects it could have on themselves, their jobs, their businesses or the economy in general … everyone was affected directly or indirectly. It did not burst the bubble, but certainly left some air out. "

Like other investors, Kravetz largely avoids consumption values ​​because of their valuation.

The Consumer Discretionary Index is trading at approximately 19.8 times estimated earnings, compared to 17.3% for consumer staples and a multiple of 15.8% for the broader S & P. , according to Refinitiv data.

"You pay more for less growth," said Burns McKinney, a portfolio manager at Allianz Global Investors in Dallas. His company owns stocks in consumer companies such as Target Corp and General Motors, but underweightes the broader consumer discretionary and commodity sectors.

Coca-Cola Co, PepsiCo Inc., Newell Brands Inc. and Walmart Inc., which fall into the commodity category, are among the companies that have not yet declared their profits, while discretionary not yet reported their revenues include retailers such as Home Depot Inc., Macy's Inc., Gap Inc. and Target.

"Large retailers like Walmart are quite valued, with solid expectations but also with some risks," Kravetz said. "Brands like Coca-Cola and Pepsi are approaching their peaks to ensure their safety during storms, but with enough risk to keep us away. Stores like Macy's and Gap are challenged. "

Jharonne Martis, Director of Consumer Studies at Refinitiv, said the retail growth was still healthy, but with growth being "significantly stronger" in early 2018, "some actions could be punished" when retailers report profits.

"We are already seeing that consumer confidence has gone down and badysts have lowered their expectations for 2019," said Martis.

So far, 71% of consumer discretionary companies have exceeded Wall Street's earnings guidance for the fourth quarter, with more than half of the results already published. According to Refinitiv data, about 64% of companies in the commodities sector exceeded estimates, according to two-thirds of the sector.

The partial shutdown of the US government for 35 days has been a major challenge for consumer businesses. During this period, hundreds of thousands of federal employees found themselves without a pay check.

Due to the closure, government data has been delayed. The US Department of Commerce's Census Bureau announced earlier this week that it will release the December retail sales report on Feb. 14.

In a recent Reuters survey, a majority of economists estimated that the closure had a significant impact on gross domestic product growth in the first quarter, with a median expectation of 0.3%.

In addition, a mbadive sell-off in late 2018, which cut 19.8% of the S & P 500 index between Sept. 20 and Dec. 24, also scared consumers, according to Morgan Stanley.

Reportage of Sinéad Carew. Edited by Jennifer Ablan and Rosalba O & # 39; Brien