Investors in large consumer goods companies should be more careful in their stock picks as post-pandemic spending sprees dry up and increasingly price-sensitive buyers begin to erode the corporations' pricing power, Investror said, citing Reuters.
Earnings warnings in sectors such as luxury goods, food and airlines fueled fears of a slowdown in the US and other major economies. Those growth worries were one factor behind the selloff, which wiped out about $4.8 trillion. dollars from global stock markets in just three days this month.
Now investors need to identify the companies that won't be hurt by the normalization of spending habits, what's left of an economic recession.
"Consumers were able to absorb the price increases thanks also to the exceptionally high level of accumulated savings during the pandemic. It looks like that is now coming to an end," commented Chiara Robba of Generali Asset Management in Paris.
"The second quarter reporting season showed some signs of a slowdown in consumers with subsequent attempts by companies to cut prices to boost consumption," she notes.
Surveys of business activity by S&P Global in July showed that companies in the US and the eurozone have not been able to pass on higher costs as easily as before.
Now there's a long list of company reports showing weakening pricing power or weakness in consumer spending.
Prominent examples include Nestle and Ryanair in Europe and McDonald's in the US alongside payments companies such as Visa and Worldline. In many cases, their stock prices decline.
40 companies have cut their expectations since the start of this season in Europe, Bank of America said on Tuesday, the biggest number in more than a year, with the majority citing weak demand, including a surprise in the US. "Signs of weakening consumers are worrying," the bank noted.
The high-margin luxury industry has not escaped the trend, and while companies point to the long slowdown in China, investors are also paying close attention to spending habits in other countries.
Kering's Saint Laurent brand cut prices of its Loulou bag in France, the UK, the US and China by 10-15% in May in a "very rare" move for the sector, which Barclays said may reflect the brand's recognition that its earlier price increases have been too aggressive.
After three years of above-average growth, luxury goods inflation is showing signs of returning to the long-term range of 5-7% or below, said Luca Solza, an analyst at Bernstein in London.
"Weak brands that took advantage of the favorable situation and raised prices significantly are now being forced to adjust through discounts and promotions," he notes. "This is happening as middle-class consumers in the West are sobering up from the post-pandemic euphoria," Solca commented.
Burberry, which fired its chief executive and warned about its profit in July, is given as one example. Its shares shed almost a fifth of their value on the day the company published its report.
Swatch and Hugo Boss became the most shorted stocks in the pan-European Stoxx 600 index after disappointing numbers, data from Mediobanca showed.
Even sector leader LVMH, Europe's second largest listed company after Danish pharmaceutical company Novo Nordisk, is not immune.
"There is certainly a sense of consumer resistance to higher prices given the ongoing cost of living crisis," said Sanjiv Tumkur, head of equity markets at Rathbones Investment Management.
"This appears to be felt across all income segments, for example, luxury goods companies are seeing a more challenging and uncertain environment for consumers in many areas, most notably China, in all but the highest segments," he added.
Consumer polarization
Gillian Dissen, senior portfolio manager at Pictet Asset Management, believes the latest reports show more consumer polarization than a general loss of pricing power.
"At the top end, most luxury brands ... are raising prices again this year, albeit at more normalized levels," she notes, adding that the trend extends beyond the luxury sector.
Carmaker Ferrari beat expectations thanks to sales of more expensive models, although consumer demand in the auto sector was volatile.
Differentiation is also a big factor – sectors with low levels of differentiation such as personal care and food and beverage may be most at risk, Roba believes.
In sporting goods, Dissen said luxury innovation brands such as On and Deckers' Hoka continued to benefit from price and sales growth, in contrast to established names such as Nike and Puma, which cut profit forecasts on Wednesday after their stocks hit a six-year low.
On airlines, Tumkur cautioned against spilling Ryanair's warning onto the rest of the industry and pointed to better demand at rivals Easyjet and Jet2.
"Furthermore, Ryanair is more of a pure low-cost airline, while its competitors have greater exposure to package holidays, which appear to be currently enjoying a higher priority with consumers. As always, stock selection will be key," he notes.