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Canadian Strategy Snapshot: Consumer Discretionary Long Outperformance Tail

 

Bottom Line

While the Consumer Discretionary sector has faced significant fundamental challenges that have only been exacerbated thanks in no small part to COVID-19, the sector has exhibited strong performance trends for the majority of 2020. In fact, this should come as no surprise as Consumer Discretionary has almost always troughed just before or during the beginning stages of recession, when there are very few compelling economic arguments to own the sector. Indeed, the key question now is how long can this outperformance persist? Our work shows, that Consumer Discretionary has one of the longest outperformance tails of traditional early cyclical areas, outperforming on average in the first year, the second year, and even in the third year following recessions. Furthermore, fundamentals have shown signs of rebounding which we believe can add fuel to continued outperformance in the quarters and possibly years ahead.

Main Points:

  • Yes an Early Cyclical, but Consumer Discretionary Outperformance Can Persist

    • While the bulk of the outperformance typically occurs in the first 12 months of recovery, our work shows Consumer Discretionary outperformance can persist beyond the first 12 months.

  • Earnings Set for Solid Rebound

    • Rebounding inventory cycle and trade volumes to be a boon for earnings over the next 12 months and beyond.

  • Elevated Valuations, but Consistent Cash Flow and Total Yield

    • Cash flow generation has been resilient in the face of recession, with cash continuing to be returned to shareholders

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Brian Belski Chief Investment Strategist



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