Investors shun US consumer stocks over recession fears

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Investors are avoiding US consumer companies that would be particularly exposed to an economic downturn, according to analysts and fund managers, in a sign that recession fears are still widespread despite robust economic data and gains in the broader stock market.

This year’s strong bounceback in leading stock indices — the S&P 500 is up 19 per cent since the start of the year and the Nasdaq Composite is up 36 per cent — hides the fact that many active investors are still cautiously positioned.

“There’s a complete lack of conviction around a cyclical recovery,” said Savita Subramanian, equity and quant strategist at Bank of America. “The only [demand] we’re seeing is for secular growth themes like artificial intelligence.”

Recent economic data has shown a combination of falling inflation and a resilient jobs market, raising hopes that the Federal Reserve will achieve the rare feat of bringing inflation back to its 2 per cent target without causing a recession.

However, BofA’s measure of hedge funds’ relative exposure to cyclical companies compared to more defensive businesses has hit its lowest level since at least 2011, while exposure among long-only fund managers was close to an all-time low.

In the first five months of the year, the “magnificent seven” — Apple, Microsoft, Amazon, Tesla, Nvidia, Meta and Alphabet — accounted for more than 100 per cent of the Nasdaq’s gains, according to Bloomberg data.

Stockmarket breadth has improved in recent weeks, but the seven companies still account for two-thirds of the total gains.

“The risk of recession is still real in our view,” said Raphaël Thuin, head of capital markets strategies at Tikehau Capital, a $40bn alternative asset manager. “We’re defensive in equities . . . and in both equities and fixed income are focusing on quality companies that will have more resilience during a recession and be less sensitive to the economic cycle.”

Some investors have been particularly wary of companies that cater to richer consumers, on account of signs that customers are trading down to cheaper brands.

The most heavily-shorted stock on the S&P 500 as a proportion of its free float is luxury retailer Ralph Lauren. The top 10 most targeted stocks also includes American Airlines, two cruise lines and a swimming pool maker, according to figures from data analytics company S3 Partners. 

The positioning reflects the unusual nature of this year’s market rally. Many investors started 2023 with limited exposure to stocks owing to expectations the US would fall into recession in the first half of the year. Fear of missing out after a strong rally in big tech has forced many investors to increase their exposure in certain areas, but without necessarily changing their fundamental views about the economic outlook. 

“A lot of the change [in positioning] recently has been reluctant,” said Parag Thatte, a strategist at Deutsche Bank. “People have been dragged in [to the market] rather than wanting to go along with it.”

The S&P 500 consumer discretionary sub-index has risen 34 per cent so far this year, but its gains have been even more lopsided than the broader market, with Amazon and Tesla together accounting for more than three-quarters of the increase, according to Bloomberg data.

BofA’s Subramanian said she was actually optimistic about the outlook for cyclical stocks, pointing to a strong labour market, rising productivity and the Fed nearing the end of its tightening cycle. “One could argue this is a pretty good set-up for cyclicals . . . it could make the beginnings of a rally profound recovery, but I’ve not met a client who is really bullish yet.”