Consumer discretionary

US retail sales have done astoundingly well. A cashed up consumer, that prioritised goods over experiences, put the series well above trend.

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Retailers, seeing the demand, dramatically raised stock (ex autos, where they can’t). Higher sales means carrying more inventory…

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…to prevent stockouts/lost sales. But if services returns, and demand for goods fades (how many kettles can you buy?) then that inventory build turns into an inventory overhang. And retail sales are pro-cyclical with housing. They respond to higher mortgage rates. And in the US (as almost certainly here) those are going up.

Inventory overhangs are usually pretty grim for consumer discretionary names. You can move the goods by cutting prices, therefore having some cashflow but a smashed margin. Or try to maintain the margin but have no cashflows.

Either way, a tough outlook for the sector. We have zero consumer discretionary exposure in our direct equity portfolios.

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