By the Select Large Cap Growth Team
In a slow-growth world, there will be few rising tides, but a focused strategy can uncover high-quality, high-growth opportunities.
Consumption makes up roughly two-thirds of U.S. GDP, and consumer confidence has rebounded.
Specific areas of opportunity within consumer sectors are: high-end consumers, value-conscious consumers and the globally emerging middle class.
What the world needs now is both love and a lot more revenue growth. Nominal GDP is currently growing at a meager 4% annual rate. So where can investors go to find growth in this environment?
Strategically, we have continued to focus on the front end of the economy, especially consumer sectors, while de-emphasizing the capital spending or back end of the economy. There, pricing power is absent and operating leverage is limited in a slow-growth world. One theme where we’re finding opportunity is that of consumer discretionary companies.
We are living in a $60 trillion global economy, and the United States represents nearly a quarter of that total (International Monetary Fund). Consumption makes up roughly two-thirds of U.S. GDP, and retail sales make up nearly half of consumption (Bureau of Economic Analysis). Consumers are more likely to open their wallets when they feel confident about their employment outlook and financial stability. Importantly, U.S. consumer confidence as measured by the University of Michigan Survey recently hit a five-year high, which is positive for the economy in general and consumer stocks in particular.
Accordingly, we maintain a significant overweight to the consumer discretionary sector and continue to find attractive stocks in the following segments:
- High-end consumers: Concerns over rising tax rates here in the U.S. as well as a moderation of growth in China and weakness in Europe are well-known at this point. But consumers at the high end tend to be more balance sheet than income statement consumers. They will still purchase $100 yoga pants, $200 facial moisturizer and $300 shoes. If they are the right brand. The key is to locate companies that can continue to gain brand share and wallet share in the future.
- Service-oriented firms: At the same time, we continue to see well-above-average growth for service-oriented companies that deliver affordable convenience to their customers across the socioeconomic spectrum. This can be in the form of warehouse clubs or dollar stores that deliver everyday consumables in a convenient location or off-price retailers with superior inventory management that can deliver brand name apparel and accessories at bargain level prices. We’ve seen even higher consumption growth in online channels for media, retail and travel, as bandwidth expands globally and the convenience of consuming wherever and whenever you want becomes a reality.
- Emerging middle class beneficiaries: Finally, we strive to unearth and invest in companies positioned to benefit from an emerging middle class globally, but particularly outside of the U.S. and Europe. While higher labor wage rates can negatively affect margins for companies that produce overseas to sell here at home, they also expand the market for restaurants, shopping, travel, leisure and entertainment. Furthermore, the increased acceptance of credit and debit cards in place of cash and checks in the emerging markets creates a long-tailed opportunity for the payments networks, which is magnified by the shift to e-commerce and m-commerce. We are even starting to see signs from governments accelerating this shift in an effort to deter corruption and capture greater tax revenue in the future.