Economic slowdown widely expected…
Across the main economies there are many examples of falling demand, for example purchasing manager surveys, UK retail sales and US new home sales, which are broadly expected to intensify in 2023 as consumers battle higher interest rates and above-target inflation, albeit the latter is expected to continue to moderate as the year progresses. Despite an expected bounce in Christmas spending due to favourable COVID-19 comparisons, the pressure on disposable income is mounting and consumers are being forced to make real choices.
…leading to a challenging outlook for profit estimates…
As macroeconomic challenges mounted through the end of 2022, consensus profit estimates continued their downward trend for UK- and US-listed consumer companies but increased marginally for their European counterparts. However, the rate of downgrades to estimates in the UK and US slowed versus prior quarters. Consensus continues to forecast profit declines in CY23 for only a few of the subsectors we track, which we believe is optimistic in the face of expected lower consumer demand. In aggregate, consensus expects year-on-year profit growth of 16%, 6% and 13% for the UK, European and North American consumer sectors, respectively, in 2023. Many of the cost pressures which companies faced during 2022 have eased, for example freight, energy and materials, which will provide increasing support to profits through the year, but the source of pressure has shifted towards employee costs. The upcoming results season will present management teams and analysts with the opportunity to revisit their expectations for the coming year.
…but downgrades are widely discounted
Global investors are well primed for an economic slowdown in the key regions. We note that the main market indices staged a strong recovery in Q422 despite the deteriorating macroeconomic outlook. As companies battled with downgrades to profit estimates, there was a notable change in momentum in share prices for some of the consumer sectors, as investors took advantage of some extreme valuation opportunities at the end of Q322 and upped their risk appetite. More consumer sectors outperformed their regional benchmarks in Q422 than in the previous quarters, and there was a tilting in outperformance towards the discretionary sectors, away from the staples sectors in the UK and Europe. As we enter 2023, our screens have identified almost 800 companies in the three key regions that are valued below their long-term low EV/sales multiples, providing investors with a favourable risk/reward profile in these companies despite the potential risks to estimates.
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