The previous exuberance has turned into utter avoidance for European consumer stocks. During the pandemic, consumers could basically do one thing with their money: buy goods as travel, theaters, restaurants, bars and other services were either closed or feared. In 2020-2022, shares of consumer goods companies were being bought aggressively by investors who were extrapolating this strong growth in sales of the pandemic period for many years ahead. They were obviously wrong. Now investors are selling the same stocks at every opportunity because they are extrapolating the recent lack or negative growth, for many years ahead. Are they wrong again ? To be fair, consumers in China and other parts of the worlds inlcuding the US (despite the well advertised "resilience" of the consumer there) seem to have temporarily cut back on items like premium drinks, autos and luxury items as they are still spending like crazy in outdoor activities, experiences and travel. But at the same time, the base effect means that companies in 2024 had a very large number to beat, because of the strong growth in 2020-2023 and we find it only natural for their growth rate to revert to the long-term average, which mathematically means several quarters of low or even negative growth.
A handful of European consumer goods companies are global leaders. You don't have to be a fashion expert to know that the ever-increasing Chinese middle class will always crave a Louis Vuitton bag or an Hermès scarf. You don't have to be a member of the Alcoholics Anonymous to know that a fine single malt or a premium Tequila will always be the drink desired by the European or American white-collar executive at a party, restaurant or simply at home. And you don't have to have kids or pets, to know that Nestlé will continue to dominate these categories globally for decades. Franchises like these are very rare to find in the US or Asia. Even in the beauty & cosmetics business, L'Oréal has overtakes its main US competitor (Estée Lauder) and currently employs 7% of its workforce in the IT department, something unheard-of for a consumer goods company. All these stellar franchises and many more are now "on sale".
Valuations have now reached levels that they already price-in pessimistic extrapolations. To this end we would highlight the performance of stocks like Nestlé, LVMH or Pernod Ricard, which all announced last week worse than expected results for Q3, but their shares rallied immediately off the lows, in a sign that they might have bottomed. To avoid any misconception, we are not claiming that these consumer stocks will rally no matter what happens in the broad market. The argument is that their underperformance is coming to an end and at worst, they will perform similar to the broad indices. They also come with nice dividend yields at current prices and are great franchises to own for the longer term.
The ECB cut the deposit rate, as expected by 25bp to 3.25%, in a unanimous decision. The announcement was a touch more hawkish than expectations, but no damage in bonds or equities was witnessed. Although inflation is likely to go up temporarily over the coming months, the ECB sees the disinflation process "well on track". And during the press conference and in deviation from the written statement, Ms Lagarde appeared to say that the balance of risk for inflation is now skewed to the downside; normally, the ECB does not communicate a net balance of risk for inflation, only for growth. The statement and Ms Lagarde's emphasized the notion of data-dependence and vouched to remain non-committal on the pace and timing of future rate cuts. The ECB will get a lot of data ahead of the next meeting on December 12th, and the market is fully pricing a cut again by 25bp.
US Retail Sales rose 0.4% in September, in line with expectations. Excluding gasoline stations, auto dealers and parts stores, sales were up 0.7% over the month. Interestingly, the details of the report didn't show a huge amount of impact from Hurricane Helene. Looking into the details, Clothing & Accessories were strong as was Food & Beverage. Electronics and appliances as well as furniture were weak. On a year-over-year basis, Retail Sales rose by 1.7% the slowest rate of growth in many months and below the inflation rate, which means that in real terms retail sales actually had negative growth since last year.
The S&P500 registered a new record high, with a 1% weekly gain. But there was also a "feeling" of rotation going on, as Small Caps (+2%) rallied and other cyclical sectors also performed well. The disappointment from Dutch semiconductor equipment maker ASML, which lowered its 2025 guidance did not last for more than a day, as Nvidia registered a new high, albeit only slightly higher than the July record. European bourses moved higher by 1% on average, with French stocks underperforming again due to the large weight in consumer names as mentioned above, but the situation changed rapidly towards the end of the week. The fresh Chinese news on more stimulus is a positive for these names.
Bonds traded in tight ranges, with Europan yields moving lower but US yields staying close to their recent highs. We should highlight the very tight spread (difference in yield) of corporate bonds vs government bonds, which is a potential source of marked-to-market losses if economic data deteriorate in the next 6-9 months. Especially the US corporate bonds' spread fell to the lowest level since 2005, rendering them rather expensive. We would stick to the highest quality and acknowledge that bonds bought today should be held-to-maturity, as capital gains look almost impossible from now on. On the contrary, AA/AAA bonds could see further price appreciation if central banks slash interest rates in response to a growth shock.
Chart of the Week : European Food & Beverages: at the cheapest valuation in ten years.
We have to start with a disclaimer. The sector was thought to be attractive at the beginning of this year, but we got this wrong (for now), as many stocks continued to slide and valuations became even cheaper. The green line is the Price-to-Earnings, which currently stands at 17, when the long-term average is north of 20. Only during the pandemic panic in March 2020, the sector traded briefly at the current valuation. The blue line is the sector's price performance, and the red square highlights the big divergence in valuation and price action. This means that the drop in prices has been much bigger than the actual drop in their earnings, what we call a valuation de-rating. We cannot know whether the sector has permanently fallen out of favor. But a classic reversion to the mean would lead to a significant outperformance vs the index, in the next 12 months.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
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• Sources: Chart of the Week : UBS , Photo: https://www.linkedin.com/pulse/consumer-buying-behavior-srajit-srivastava/o
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