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Consumer Cyclical: Consumer Volatility Creates Investment Opportunities

The market now appears to be pricing in more conservative long-term cash flow assumptions than baked into our longer-term consumer cyclical valuations.

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  • Our consumer cyclical universe trades at a median price/fair value of 0.99 after spending much of the year modestly overvalued. Although we acknowledge the possibility of more-volatile consumer spending trends than we've become accustomed to across the globe, as well as supply/demand inventory imbalances throughout the remainder of 2015 and into 2016, we believe the market now appears to be pricing in more conservative long-term cash flow assumptions than baked into our longer-term consumer cyclical valuation assumptions.
  • The apparel sector has been very challenged, and we continue to see headwinds into 2016. We think that warm weather, poor inventory management, a lack of new fashion trends, and shifts to other distribution channels and product lines have contributed to the weakness.
  • We continue to see China as a key driver of investor concern, especially in the luxury goods space. However, despite China's risks and macroeconomic issues, we believe even small rates of growth will yield significant opportunities for luxury firms. With Chinese consumers already responsible for 30% of global luxury goods purchases, the continued growth of wealthy and upper-middle-class consumers appears to offer great potential. 

Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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