Consumer stocks cheer investors
Consumer stocks cheer investors
Major sellers of discretionary goods posted upside earnings surprises at the tail-end of the earnings season. This helped the S&P 500 stock index end the quarter about even from a year earlier. Analysts had expected companies in the index to post the first quarterly earnings decline in three years.
Consumer discretionary stocks show signs of strength that much of the S&P 500 does not — double-digit year-over-year growth, a high percentage of companies beating analyst forecasts, and strong growth projections for coming quarters.
“Consumer sentiment has been improving steadily and this is affecting retailers to some extent, and retailers are also getting a boost from consumers getting their own fiscal matters in order,” said Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management, in Champaign, Illinois.
The sector’s strength is a hopeful sign for the US economy although it does not mean US growth is roaring. Uncertainty about Washington’s wrangling over the fiscal cliff, and weak demand worldwide, could change the US outlook in a hurry.
Still, reduced exposure to Europe and other weak overseas markets helped sellers of electronics and home improvement goods outperform the rest of the equity market. With results in from most companies, S&P consumer discretionary sector earnings are up 12.1 percent from a year ago, the only sector boasting double-digit growth.
Strong consumer sentiment in recent months has boosted retail sales. US consumer confidence rose last month to its highest level since February 2008, according to data from the Conference Board.
The household debt service ratio — an estimate of the share of debt payments to disposable personal income — fell to 10.69 percent in the second quarter, the most recent data available, according to the US Federal Reserve. It was the strongest ratio since the fourth quarter of 1993.
By contrast, CEO confidence remains weak. A Business Roundtable survey released in September showed its index of CEO confidence fell to its lowest point since the third quarter of 2009.
A Thomson Reuters analysis shows earnings growth for 10 of the biggest consumer discretionary companies, including Home Depot and Target, is at 10.3 percent.
This is much stronger than 10 S&P 500 companies with heavy international exposure such as Coca Cola Enterprises and Cisco Systems. These show earnings growth declining 2.9 percent from a year ago.
The euro zone’s debt crisis has dragged the bloc into its second recession since 2009 in the third quarter.
S&P 500 earnings for the third quarter are flat from a year ago, even though a majority of companies have missed revenue expectations. Of companies that have reported, 61 percent have missed revenue expectations for the third quarter.
Without consumer discretionary stocks, S&P 500 quarterly earnings would be down 1.1 percent, Thomson Reuters data shows. Analysts had predicted the first decline in earnings since 2009.
The percentage of companies beating expectations in the sector, at 75 percent, far surpasses the 65 percent for the entire S&P 500, according to Thomson Reuters data.
Shares have outperformed as well. The S&P consumer discretionary index is up 14.6 percent for the year, while the S&P 500 is up 7.3 percent.
US retailer Target — one of the 10 largest consumer discretionary names by market value — recently posted profit that beat analysts’ expectations. Wal-Mart, the world’s biggest retailer, posted disappointing sales and said store traffic in China declined again. Wal-Mart, a consumer staples stock, derives 28 percent of its sales from overseas.
Surprisingly strong results also came this week from clothing retailers Gap and Abercrombie & Fitch, both of which also raised their full-year outlooks. Gap’s stock had already surged this year, up 81 percent since the end of 2011, while Abercrombie’s stock surged 30 percent this week.
Many analysts say the mostly stronger-than-expected results from retailers signal that holiday sales could be strong this season despite a sluggish US economy.
“The housing market has been posting some really really encouraging data. That should send nice ripple effects across the economy, a multiplier effect through the consumer,” said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, whose firm manages about $ 13 billion in assets.
Consumer companies could keep supporting earnings in the S&P 500. Double-digit earnings growth is expected for the sector through next year, Greg Harrison, Thomson Reuters corporate earnings research analyst, said in a recent earnings report.
Earnings for the consumer discretionary sector are forecast to rise 14.3 percent for the fourth quarter as well as for the first quarter of 2013.
“That could be a very nice positive catalyst. Will it be enough to completely offset a severe ‘fiscal cliff’? Probably not, but the timing might work out where it could be a pretty significant force,” Trunow said.
All-American banker heads back to the Kingdom
- "The implementation and execution of Vision 2030 will produce global companies for Saudi Arabia, and we can help in that process," said Citigroup CEO
- "The government has a lot on its plate and privatization takes a long time to set up. Privatization is one of those things that you only want to do once,”
If anybody deserves the description “all-American”, it is surely Mike Corbat, chief executive officer of Citigroup.
New England origins, a Harvard education, Ivy League American footballer and a Wall Street career are all evidence of the fact he was very definitely “born in the USA”, as is the in-bank nickname of “Clark Kent” — the alter-ego of Superman — due to his athletic physique and spectacles.
But last week Corbat was turning his mind away from the USA and toward Saudi Arabia, as the bank formally ended a 14-year self-imposed exile from the Kingdom with a ceremony at its new offices in Riyadh, symbolizing its return to the lucrative markets it first entered in the 1950s, among the first American banks to do business in the region.
Corbat took some time out of the day’s celebrations — a formal ribbon-cutting alongside Ibrahim Al Omar, governor of the Saudi Arabian General Investment Authority, and an elite dinner in the ballroom of the Four Seasons Hotel in Kingdom Tower — to talk exclusively to Arab News about Citi’s plans for the Saudi business at a time of rapid transformation in the Kingdom and the region.
“I am absolutely positive about the economic prospects for this region. We are in 13 countries here, with 2,500 employees, focusing on trade and business, with some consumer presence. The implementation and execution of Vision 2030 will produce global companies for Saudi Arabia, and we can help in that process. Citi can service some of their needs as they expand globally,” he said.
Citi withdrew from Saudi Arabia in 2004 in the aftermath of the 9/11 terrorist attacks in the USA, in a decision later described by executives as “a mistake.” Even before the enormous opportunities of Vision 2030 persuaded the bank it had to have a formal presence again in the Kingdom, and a license from the Capital Markets Authority (CMA) to pursue investment banking and other business there, the bank was back on the scene.
In 2015 it helped Saudi Aramco to raise multi-billion dollar loans, and advised the oil giant on Asian deals. The following year, which saw the formal unveiling of Vision 2030, Citi was involved in the groundbreaking $17.5 billion bond issue that marked the Kingdom’s debut on global capital markets.
Citi was back, but needed a CMA license to win more lucrative business in the big domestic economic transformation under way. That was finally granted in April of last year, and Carmen Haddad, a long serving Citi executive with extensive experience of the Middle East, was made head of the new Saudi operation.
“We’ve been at the front and center of the sovereign bonds drive Saudi has been doing for the past couple of years, and also with syndicated loans. But with the CMA license we can really show our worth. We can help with all future debt and equity transactions,” Corbat said.
Vision 2030 aims to reduce the Kingdom’s dependence on oil, but also to increase the contribution of the private sector to the national economy, and this is one area where Citi feels it can use its global experience. The bank has advised governments around the world on privatization strategies, and Saudi has a privatization schedule that ranks among the largest in history.
The timing and scale of the program is still unclear. Last year minsters put a value of $200bn on the program, but officials in Riyadh last week were talking more in the $60bn to $70bn range. And investors are still waiting for the first big sell-off of a state company. But Corbat insisted Citi would be ready to get involved when the time is right.
“Privatization is obviously a top priority of the Vision 2030 strategy, and we can bring our expertise to bear in this. I think it is right to take your time over something as significant as the privatization program. The government has a lot on its plate and privatization takes a long time to set up. Privatization is one of those things that you only want to do once,” he said.
By far the biggest element of the drive toward a more private sector-focused economy is the plan to sell shares in the Kingdom’s “jewel in the crown”, Saudi Aramco. Citi is among a small group of top global banks vying for business in the Aramco sell-off.
Originally planned as a big international initial public offering (IPO) by the end of this year, valuing the company at $2 trillion, doubts have begin to creep in over the valuation figure, and over the venue for what promises to be the biggest IPO in history. One suggestion is that Aramco will go only for a listing on the Tadawul exchange in Riyadh.
“I don’t know the timing of the IPO. Maybe they [the Saudi authorities] will want to start locally, in which case they have to be sure the capacity and liquidity are there,” Corbat said.
He believes that recent improvements to the market infrastructure in Saudi Arabia — which look set to see the country included in index provider MSCI’s widely-tracked Emerging Markets index from as early as next year — could make an “exclusive” IPO on Tadawul more attractive.
“The MSCI upgrade to emerging markets status will create more liquidity, and foreign investors will have to play their role,” he said.
“All the big reforms that have taken place on the Riyadh market recently have certainly made it a friendlier place for foreign investors. The CMA has been through more change than ever, and it’s a better place for that. The CMA over the past two years has proven to be progressive and consultative,” he added.
Citi found itself indirectly involved in the big anti-corruption campaign of last year, when their long-term partner and shareholder, Price Alwaleed Bin Talal, was among the businessmen detained in the Ritz Carlton hotel in Riyadh.
Corbat is reluctant to comment on the Kingdom’s internal affairs, though he did say that foreign direct investment would not be hit by the anti-graft drive. “I don’t think FDI has been or will be affected negatively by the anti-corruption campaign. Saudi Arabia is already the biggest economy in the region with only limited foreign investment. Imagine how far it could go with more,” he said.
On Alwaleed, he said: “He has been a shareholder since the early 1990s, and he has been a great shareholder, a loyal voice of support and reassurance. We’ve been fortunate to be able to count him as one of our shareholders. In all our dealings with him I’ve found him to be straightforward and transparent.”
Corbat was one of the top American executives who met with Saudi officials on the recent royal visit to the USA, intended in part to counter any adverse investor sentiment from the anti-corruption arrests, and was impressed by what he saw.
“The visit to the USA by the Crown Prince was extremely well received. The whole Saudi delegation impressed us with their drive and commitment to the transformation process. It was a very successful exercise for Saudi Arabia,” he said.
With 35 years at Citi under his belt, including responsibly for unwinding Citi’s “toxic” assets after the financial crisis, and wide ranging experience of the bank’s international operations, he is well placed to gauge global geo-politcal risk.
He sees some threat to the world financial system from the end of quantitative easing, which he called a “renormalization of the global economy”, and a more limited challenge to world economies from possible “trade wars” between the USA and China.
“I think it’s fair to say that if we did have a serious trade war, it would have an effect. But it would not be the end of trade. I think it’s more likely to redraw the trade lines of the world. Trade flows would move away from the big blocks and go through other areas, like Africa and other places for example,” he said.
On regional risks, always a factor in business and financial decisions in the Middle East, he said: “I think they are within acceptable limits and I don’t think they will go beyond that. The region is the leading center for oil and gas so what happens here has global implications,” he said, though with the caveat that the effects of a prolonged trade was on the “bookend” economies of the USA and China could have a negative impact on global commodity prices.
All-American Corbat may be, but Citi’s return to the Kingdom will just not be an exercise in stuffing US executives into the top jobs in Riyadh. The firm is committed to achieving 85 percent Saudi employment levels at its new office, and is already well on the way to achieving that.
“The market for talent in Saudi Arabia is extremely competitive, but we think we have a very strong appeal for candidates. We are very proud of our ability to invest in and train, and to improve home grown talent,” Corbat said.