Is Italy leading the surge in consumer discretionary goods?

Introduction

It seems that we are finally approaching a pivotal moment: after grappling with the economic fallout of Covid-19, followed by a rapid inflationary escalation, Europe seems to have navigated through the worst, as the peak in interest rate is suggesting, setting the stage for economic recovery and continued growth. Despite the challenges, the economy exhibits a resilience that suggests it is well-prepared to bounce back and maintain a growth trajectory.

Historically, it’s observed that during periods of economic recovery, certain sectors tend to outshine others in the stock market. Notably, stocks associated with consumer discretionary spending often lead the charge, boosted by increased consumer confidence and spending power. This pattern seems to be holding true in the current climate, as reflected in the strategic choices of numerous portfolio managers who, in recent days, have shown a marked preference for these types of stocks.

As shown in Graph 1, European consumer discretionary stocks have kicked off the year 2024 with impressive vigor, setting a positive tone that suggests a sustained upward trend throughout the year. This optimistic outlook is not unfounded, as consumers, feeling more secure financially, are likely to increase their spending on non-essential goods and services, thereby propelling the stocks in this sector.

Graph 1, comparison between consumer discretionary and staples

Among the standout performers, Stellantis, an automotive powerhouse, is navigating through an exceptionally positive year. The company’s performance is noteworthy, with its stock price reflecting a year-to-date increase of nearly 26%, a figure that signifies robust investor confidence and a strong market position. This upward trend is not isolated to Stellantis alone; the broader market index, particularly the Eurostoxx 50, mirrors this positive momentum, showcasing an impressive 11% rise year-to-date.

Graph 2, consumer linked sectors in Europe

Specifically looking at the sub-sectors, graph 2 depicts how retail initially lagged behind Stoxx 600 index, as the market was mainly driven by healthcare and technology companies at the beginning of the year. Retail sector then start rising mid February.

These indicators, while specific, are reflective of a larger trend in the European market. The concerted rise in consumer discretionary stocks, coupled with the overall market resilience, points towards a recovering and potentially thriving economic landscape. Investors, recognizing the historical patterns and current market dynamics, seem poised to capitalize on this phase of growth, suggesting a broader sense of optimism for the European economy’s trajectory in the year ahead.

Italy vs Europe: a comparative analysis

Considering the aforementioned points we decided to explore how this wave impacted Italy and its consumer discretionary equity prices as the country is known for its luxury and automotive industry. Firstly, Italy’s main index for this study - Ftse Italia All-Share Consumer Discretionary, indeed shows rapid growth with a 25% rise within the last 3 months. More uniquely however, unlike the rest of Europe, the significant rise started earlier as the last 6 months of our index saw an even higher - 43% surge (versus the 18.5% rise in Europe as a whole).

Graph 3: Inflation projections for Italy

One of the key reasons for this growth in Italy mirrors what we said about Europe as a whole - expectation of rate cuts based on revised inflation projections. According to European Commission’s report, inflation in Italy is expected to significantly drop in 2024 to 2% (compared to 5.9% in 2023). Furthermore, this projection is even more positive than the one posted by the Commission in Autumn which further explains the recent surge in Consumer Discretionary Equity.

An important point to make is the contrast in the performance between Consumer Discretionary and Consumer Staple stocks. As can be seen in graph 4 below, in both Italy and Europe there appeared a divergence between the performance of these two classes of goods. This can be explained by the nature of consumer staples. Indeed, these firms have recorded lower revenues in the period and have a lower growth potential. This, combined with the expectations of rising demand for consumer discretionary brought to a massive portfolio reallocation in favour of the latter. Nevertheless, some equity analysts still call this a false dawn for the European economy and recommend staying with the more stable consumer staples.

Graph 4: comparison between consumer staples and discretionary in EU and Italy

Conclusion

As we have seen in our analysis, Italy is currently magnifying the effects of both consumer staples and consumer discretionary in comparison to the European market, perhaps because of the strong positioning of the Italian market in the discretionary sector, fostering a larger portfolio reallocation, further penalising consumer staples.

Finally, despite the recent trends, staples are still considered a safe investment in the current economic cycle and are still recommended by some research analysts due to their recent underperformance.

Sources

Stacey, S. (2024, March 20). Investors bet on European consumer stocks as economic confidence grows.

https://www.ft.com/content/e436675c-7290-4360-88a6-b3e119173b1f

Economic forecast for Italy. (2024). Journal of Economy and Finance, European Commission.

https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/italy/economicforecas t-italy=en 

Italy industries indexes.

https://www.borsaitaliana.it/borsa/indici/indici-settoriali/dettaglio.html?indexCode=ITLMS45&lan g=en

Black Rock ishares msci-europe, consumer discretionary sector, etf chart

https://www.blackrock.com/it/consulenti/products/315809/ishares-msci-europe-consumer-discre tionary-sector-ucits-etf#chartDialog

FTSE Italy Consumer Discretionary Index.

https://www.borsaitaliana.it/borsa/azioni/settori/lista.html?indexCode=ITLMS40&lang=en

Italy inflation rate.

https://www-statista-com.eu1.proxy.openathens.net/statistics/270489/inflation-rate-in-italy/