Low economic growth and the well-known pressures on consumer incomes continue to produce winners and losers between and within the consumer sectors. Despite the economic challenges, there was improved momentum for CY23 profit (EBIT) forecasts in Q223, specifically for the discretionary sectors, suggesting some input cost pressures have eased and evidence of proactive management of costs. While macroeconomic news is likely to remain volatile, our valuation screens continue to highlight many attractively valued companies in the consumer sectors.
Consumer confidence better, but volatile
Consumer confidence, although still low, has been on a broadly improving trend in the UK and Europe for most of 2023. In the UK, increasing wage growth, for some, and the expectation that inflation has peaked were likely positive influences earlier in the year, but higher interest rates and the slower-than-expected decline in inflation have suppressed confidence more recently. The demand backdrop remains challenging in aggregate but moderating input costs inflation, albeit with some transference of the pressures to staff costs, suggests less pressure on operating profit estimates than previously. A key challenge for many companies will be whether they can hold on to sourcing gains as they fight for market share against a backdrop of muted demand.
Profit forecast momentum improved in Q223
Profit estimates at the individual company level remain volatile as consumers have been forced to prioritise where they spend their money. However, there was a notable change in momentum to aggregate consensus CY23 profit estimates for the sectors during Q223. The net upgrades for the discretionary sectors in the UK, Europe and North America and for the European staples sectors, suggest these are managing the external demand and cost pressures better. At the end of June 2023 consensus was forecasting double-digit profit growth in 2023 for all regions. The overall projected profit growth is skewed towards a recovery by the discretionary sectors, typically representing up to 80% of the incremental growth. Growth is concentrated in a number of key sectors, which varies by region, but a more buoyant outlook for travel and leisure related sectors appears unanimous.
Exhibit 1: Consensus growth expectations
Valuations most attractive in UK and Europe
Despite the favourable change in consensus profit growth projections, the consumer sectors’ equity performance was more muted in Q223, following the strong rallies from their lows in Q322. Our screens highlight that the consumer universe continues to offer numerous attractive valuation opportunities, with continued greater apparent value at the subsector level in the UK (Exhibit 13) and Europe (Exhibit 19) than in North America (Exhibit 24).
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