2023 Sector Snapshot: EUR Consumer

Mariya Nurgaziyeva, CFA – European Consumer & Support Services Senior Analyst
Maryum Ali, CFA - European Consumer Senior Analyst
Amarveer Singh – European Retail Analyst
Sahil Arora - European Strategy Analyst
Winnie Cisar Global Head of Strategy
Brian Perez – Strategy Analyst
Zachary Griffiths, CFA - U.S. Strategy Senior Analyst

EXECUTIVE SUMMARY
  • We provide our Consumer sector strategy for 2023, including key themes, picks and pans, and risks for the coming year.
  • IG Autos (Market perform). We remain comfortable with the sector given profitability and free cash flow generation remain at record highs, coupled with our view that fears over the impact of weakening consumer demand are overblown.
  • IG Consumer Goods (Market perform). Our Market perform recommendation reflects the sector’s defensive credentials and relatively robust credit fundamentals heading into 2023. We expect stable to slightly weaker sector fundamentals in FY23 as a result of the tougher macro environment, but cash flow generation should remain robust.
  • IG Retail (Underperform). Our Underperform recommendation reflects the sector’s tight spreads compared to the wider index (~60 bp differential), as well as some concerns over further pressures on consumer spending going into next year. Moreover, in a scenario of an improving macro backdrop, we would expect sectors that are trading wider to perform better than Retail. Although we are relatively constructive on the luxury names, given their wealthier customer base, the sector is not completely immune to a recession given the potential loss of aspirational shoppers.

Autos

Key Themes for 2023

  • The impact of supply chain constraints on volume evolution
  • Signs of weakening consumer demand for new vehicles
  • Stubbornly high inflation, especially from wages and energy

Top Risks for 2023

  • Slower than expected easing of COVID-19 restrictions in China
  • Implementation of energy rationing in Europe
  • Lower residual values for captive financing arms

Relative Value

European Auto spreads have widened year to date but have comfortably Outperformed the broader IG index. This is somewhat counterintuitive give the automotive sector is cyclically exposed. However, the sector has been subject to an extraordinary environment for more than 24 months now on the back on lingering supply side challenges, which have driven profitability and free cash flow generation to record levels. At the same time, as a shorter duration sector, the auto sector was slightly more insulated from the underperformance of duration more broadly through 2022.

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