Investors look for consumer pressure ahead of new tariffs

In this June 10, 2019, file photo, a man walks past a money exchange shop decorated with different banknotes at Central, a business district of Hong Kong. (AP)
Updated 11 August 2019

Investors look for consumer pressure ahead of new tariffs

  • Investors and analysts are anxious about the impact of Trump’s planned 10 percent tariff on the remaining $300 billion in Chinese imports, which will largely affect consumer goods

NEW YORK: As President Donald Trump prepares to slap new tariffs on Chinese imports, investors are bracing for signs of pressure on US consumers as top retailers begin reporting quarterly results next week and key consumer sentiment and retail sales data is released.
Investors and analysts are anxious about the impact of Trump’s planned 10 percent tariff on the remaining $300 billion in Chinese imports, which will largely affect consumer goods, unlike the previous round that fell heavily on industrial and business products. That could be a double-whammy for the US economy, which is about 70 percent driven by consumers, and retailers.
Mona MaHajjan, US investment strategist at Allianz Global Investors in New York, is among analysts focusing on the fallout from the tariffs, noting that the planned new round will “disproportionately” impact consumer goods. “We’ll be watching the data particularly around retail sales and consumer confidence,” MaHajjan said.
“We’ll continue to monitor the softening in manufacturing and inflation as well, but more important for the US economic picture is the consumer right now.”
Excluding autos, July retail sales  are expected to have grown 0.3 percent compared with 0.4 percent in June, according to a Reuters poll. On Friday, The University of Michigan’s preliminary August reading of consumer sentiment is expected to show a slip to 97.7 from 98.4 in July.
The S&P Retail index fell a total of 5.3 percent in the first three trading sessions following Trump’s Aug. 1 tariff announcement. As of Thursday’s market close, the index was down 1.6 percent for the month so far.
UBS analyst Jay Sole said fears that the tariffs could eventually increase to 25 percent were also an overhang for stocks. Morgan Stanley has estimated that 25 percent tariffs would lead to a global recession.

We’ll continue to monitor the softening in manufacturing and inflation, but more important for the US economic picture is the consumer right now.

Mona MaHajjan, US investment strategist

Retailers will have the dilemma of deciding whether to pass the tariffs on to consumers in the form of higher prices or absorb the higher costs, which would reduce profit margins.
“If you’re in a competitive environment you’re going to take some action to keep your customers,” said Charles East, an equity analyst covering consumer companies at SunTrust Private Wealth Management, who said that department stores are particularly vulnerable.
“I really don’t think they can push prices up because their sales are already weak,” East said. “The margins are under pressure. Perhaps they can accelerate cost-cutting.”
With two thirds of US footwear coming from China, for example, UBS’s Sole will look for comments in earnings calls and statements on how retailers and footwear companies plan to handle the tariffs.
“It’s a big deal. Our assumption is that there will be an attempt to raise prices on the goods,” Sole said.
“We think consumers are going to resist those price increases,” he added, citing a UBS survey of 7,660 consumers in July that showed 77 percent of respondents were worried the China trade war would cause prices to rise.
Retailers reporting next week include Macy’s Inc, Walmart Inc. and Tapestry Inc, whose brands include Coach, Kate Spade and Stuart Weitzman. The following week Kohls Corp, Target and Nordstrom Inc. will all report.
The S&P Consumer Discretionary index, which includes big retailers, is expected to report a 1.2 percent increase in second-quarter earnings, according to IBES data from Refinitiv.
But estimates for the rest of the year have been falling. Wall Street now expects third-quarter earnings growth of 1.8 percent compared with a 6.8 percent expectation on July 1 while the fourth-quarter estimate has fallen to 6.5 percent from 9.8 percent.
Mitigating factors for consumer companies include a strong labor market, low inflation, declining interest rates and low gas prices, according to David Joy, chief market strategist at Ameriprise Financial in Boston.
But Joy cautioned that recent strength in the Conference Board’s Consumer Confidence index may not last.
“When confidence is at these types of levels, it may have peaked and will decline if the economy slows further or the stock market sells off sharply,” he said.


HP rejects Xerox takeover bid, says open to acquiring Xerox instead

Updated 11 min 53 sec ago

HP rejects Xerox takeover bid, says open to acquiring Xerox instead

  • In rejecting Xerox's $33.5 billion cash-and-stock acquisition offer, HP said the offer “significantly” undervalued the personal computer maker
  • Xerox made the offer for HP on Nov. 5 after resolving its dispute with its joint venture partner Fujifilm Holdings Corp.
NEW YORK: HP Inc. said on Sunday it was open to exploring a bid for US printer maker Xerox Corp. after rebuffing a $33.5 billion cash-and-stock acquisition offer from the latter as “significantly” undervaluing the personal computer maker.
Xerox made the offer for HP, a company more than three times its size, on Nov. 5, after it resolved a dispute with its joint venture partner Fujifilm Holdings Corp. that represented billions of dollars in potential liabilities.
Responding to Xerox’s offer on Sunday, HP said in a statement that it would saddle the combined company with “outsized debt” and was not in the best interest of its shareholders.
However, HP left the door open for a deal that would involve it becoming the acquirer of Xerox, stating that it recognized the potential benefits of consolidation.
“With substantive engagement from Xerox management and access to diligence information on Xerox, we believe that we can quickly evaluate the merits of a potential transaction,” HP said in its statement.
The move puts pressure on Xerox to open its books to HP. Xerox did not immediately respond on Sunday to a request for comment on whether it will engage with HP in negotiations as the potential acquisition target, rather than the acquirer.
HP on Sunday published Xerox CEO John Visentin’s Nov. 5 offer letter to HP, in which he stated that his company was “prepared to devote all necessary resources to finalize our due diligence on an accelerated basis.”
Activist investor Carl Icahn, who took over Xerox’s board last year together with fellow billionaire businessman Darwin Deason, said in an interview with the Wall Street Journal last week that he was not set on a particular structure for a deal with HP, as long as a combination is achieved. Icahn has also amassed a 4% stake in HP.
Xerox had offered HP shareholders $22 per share that included $17 in cash and 0.137 Xerox shares for each HP share, according to the Nov. 5 letter. The offer would have resulted in HP shareholders owning about 48% of the combined company. HP shares ended trading on Friday at $20.18.
Many analysts have said there is merit in the companies combining to better cope with a stagnating printing market, but some cited challenges to integration, given their different offerings and pricing models.
Xerox scrapped its $6.1 billion deal to merge with Fujifilm last year under pressure from Icahn and Deason.
Xerox announced earlier this month it would sell its 25% stake in the joint venture for $2.3 billion. Fujifilm also agreed to drop a lawsuit against Xerox, which it was pursuing following their failed merger.

Test for new HP CEO
In 2011 as the centerpiece of its unsuccessful pivot to software. Little over a year later, it wrote off $8.8 billion, $5 billion of which it put down to accounting improprieties, misrepresentation and disclosure failures.
More recently, HP has been struggling with its printer business segment recently, with the division’s third-quarter revenue dropping 5% on-year. It has announced a cost-saving program worth more than $1 billion that could result in its shedding about 16% of its workforce, or about 9,000 employees, over the next few years.
Xerox’s stock has rallied under Visentin, who took over last year as CEO. However, HP said on Sunday that a decline in Xerox’s revenue since June 2018 from $10.2 billion to $9.2 “raises significant questions” regarding the trajectory of Xerox’s business and future prospects.