ConsumerWatch – A Spring in the step

Edison clients mentioned in this report

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Rocky economic recovery with enhanced risks

Investors entered 2023 with relatively low expectations for economic growth, and the consensus view was that consumers faced challenging times given above average inflation and higher interest rates. While some inflationary pressures have eased, the International Monetary Fund (IMF) recently highlighted that underlying inflation remains ‘stubbornly high’, despite significant reductions to some commodity costs. As a result, its global GDP growth forecasts for 2023 were relatively unchanged during the quarter.

Consumer confidence remains low and the effects of above-average inflation and higher interest rates means that consumer spending remains under pressure in the key regions covered in this report, which means consumers are continuing to have to prioritise where they spend their money, suggesting that volume growth for all will not be what it once was.

Despite the tough backdrop, the UK and mainland European consumer sectors’ aggregate Q123 returns of 4% and 12% were ahead of their regional indices, 2% and 9%, respectively, although the North American consumer sectors marginally underperformed with a return of 5% versus the market return of 7%.

Profit estimates continue to be at risk…

We believe that 2023 earnings forecasts remain on a downward track, which is set to accelerate given the recent stresses in the banking system. The challenging macroeconomic environment continued to exert downward pressure on aggregate consensus CY23 profit (EBIT) estimates for the consumer sectors through the first quarter of the year. For the UK and European sectors, the main cause of the downgrades was a relatively disappointing earnings season, which meant that CY22 base profits were lower than had been forecast at the end of 2022. However, in absolute terms, the downgrades to CY23 profit estimates for both regions were lower than the reductions to the CY22 bases, implying underlying upgrades for CY23 during the first quarter. The sector averages mask many moving parts, but it is interesting to note that discretionary sectors have continued to benefit from better earnings momentum through Q123 than the staples sectors despite the external challenges. The North American sectors fared less well on a relative basis, with greater absolute downgrades to CY23 profit estimates than to the CY22 base, indicating further underlying downgrades in the first quarter. Above average inflation continues to support revenue growth estimates, but volume growth remains challenging for many companies.

Exhibit 1: Consensus growth expectations

…but low valuations continue to appeal

Despite pessimism about the outlook for consumer spending and profit expectations, investors have been willing to look through the challenging macroeconomic news in the main, attracted by the relatively low trading multiples of a large number of companies. Our screens continue to highlight many companies in the three regions that are valued below their long-term multiples, which suggests a continuing favourable risk/reward profile for investors.

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