The golden period of consumer discretionary stocks could well be coming to an end as inflation and runaway energy costs flank shoppers from both directions.
According to data shared by Saxo Bank, consumer discretionary stocks are down 13% since peaking in November 2021, and the energy crisis is yet to be priced in.
“The European luxury industry is probably going to be the hardest hit,” according to Peter Garnry of Saxo Bank, citing big-ticket brand names including LVMH, Hermès International, EssilorLuxottica and Richemont.
European car brands including Mercedes-Benz and BMW could also feel the pinch.
As for the electric vehicle (EV) industry, “the big open question is whether the EV adoption is strong enough to shield Tesla from the demand destruction”.
“Consumer discretionary stocks have been one of the big winners since the Great Financial Crisis,” said Garnry. “But with households under pressure we expect demand to cool dramatically and several sell-side firms have drastically cut their price targets on many European consumer discretionary companies.”
Discretionary spending in the UK is expected to take a big hit, exacerbated by falling wages in real terms.
Data published by Consultancy.uk this morning suggested the spending power among British consumers is “set to hit a historic low,” portending price reductions for the likes of Diageo, Burberry, Mulberry and Aston Martin.
Aston Martin is already getting hit, after first-half results underscored substantial losses, although supply chain issues likely contributed.
As previously mentioned in Proactive, the UK could also face a knock-on effect from a mass sell off of high-end luxury items in China.
Other side of the coin
If consumer discretionary stocks are in for a rough ride, where does Garnry see some market optimism?
“The energy tax is bad for consumer stocks but good for global energy companies,” Garnry observed, pointing out that primary energy costs as a percentage of global GDP have effectively doubled since last year.
On that note, FTSE-quoted large-cap Shell was mentioned by UBS as among the five FTSE 350 "quality stocks" that are still trading on "recessions discounts".