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Quarter-End Insights

Consumer Cyclical: Near-Term Concerns Over China Create Buying Opportunities

Most of the market's global macro fears are derived directly from China, where we've heard cautionary statements from a number of consumer-facing companies.

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  • Our consumer cyclical universe trades at a median price/fair value of 0.95 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 throughout the balance 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.
  • Most of the market's global macro fears are derived directly from China, where we've heard cautionary statements from a number of consumer-facing companies. Consumer spending trends may take time to stabilize, but we continue to take a constructive view on companies with exposure to China's growing middle class due to favorable wage growth and job creation/urbanization trends.
  • Although we admit that the long-run health of the Chinese economy is significant to our luxury coverage universe, we believe these names are well-positioned to weather the highs and lows of the annual sales trends given the strength of their powerful brand intangible assets, many of which have endured for several decades and provide the foundation for our sectorwide wide- and narrow-moat ratings.

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