Perspectives and Outlook on Key Sectors for 2023

Consumer companies: Near-term challenges but tailwinds from pricing power, resilient demand and reopening

Against the background of soaring inflation and unprecedented interest rate hikes, high energy costs, supply chain challenges, the Russia-Ukraine conflict and continued Covid restrictions in China, the performance of our consumer holdings has been mixed this year. 

Some of our companies have benefited from re-opening trades and pent-up consumer demand while other higher multiple stocks have suffered disproportionately from de-rating in the rising interest rate environment.  From a fundamental perspective, our consumer companies have been resilient in navigating through these challenges.  Consumer demand for their products has been strong and they have been able to raise prices to partially offset rising costs, protect margins and enhance profitability.     

Going into 2023, we see growth normalising from the high level of 2022 to pre-Covid levels, with some risk that high inflation will dampen consumer demand in the first and second quarters of the year.  We are reassured that many of the consumer companies in our portfolio have strong brands, innovation and pricing power.  Buyers of their goods are less sensitive to higher prices, which should allow them to generate resilient revenues and profitability. 

China is going through an unexpected and precipitous easing of Covid restrictions.  We had anticipated a full re-opening in the spring of 2023, which could now happen even more quickly after the Chinese New Year.  It adds to the uncertain outlooks for the first quarter of next year as the Chinese economy could be impacted significantly as consumers stay at home to avoid getting Covid infections.  However, once the economy re-opens fully, activity is likely to surge, driven by strong corporate and consumer demand after the long period of restrictions, the resumption of international travel and likely government stimulus. It should provide direct tailwinds for several of our companies that have revenue exposures ranging from 15 to 24% to Chinese consumers.  

The secondary effect of re-opening in China should further reduce local supply chain bottlenecks and shipping costs, which in turn should alleviate some of the cost pressure facing manufacturers in the US and Europe.  This should ultimately ease inflationary pressures, allow for a stabilization of interest rates, and support corporate profit margins and profitability.  The path for consumer-facing stocks is likely to be bumpy in 2023, but we remain optimistic that our holdings will remain resilient.

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