Sean Peche: Navigating the Consumer Discretionary maze
By Sean Peche
“I see you’re overweight Consumer Discretionary - you must be very positive on consumer spending,” remarked a client
No, don’t conclude that, we question the usefulness of Sector classifications
Especially for Consumer Discretionary
“Why?”
Well, look at the MSCI World Consumer Discretionary Index factsheet & you’ll see the largest constituent is Amazon
Yes, because they’re retail
Except 58% of their operating income is from their cloud business, AWS
Microsoft also has a large cloud business (35% of OI)
but they’re in the Information Technology (IT) sector
And Alphabet also has a large and growing cloud business
but they’re in the Communication Services sector
Well, that’s because of Search and Advertising
Yes
Except Advertising is also a big earner for Amazon
But aren’t the goods that Amazon ship, Discretionary?
Yes, but then the other “goods shippers”, UPS and Fedex, are in the Industrial
Sector…
And you know those credit cards you use for your Amazon purchases?
Yes
Well, Visa and Mastercard are in the Financial sector
But only since 2021
Before that they were Information Technology Sector companies....
You’d think expensive Apple iPhones are Consumer Discretionary items
But no, they’re Information Technology
Whereas Sony with their expensive Playstation is Consumer Discretionary
Except Playstation game makers like EA
Are Communication Services…
Every tried communicating with a teenage gamer?
However, not all game companies are treated this way
Mattel is Consumer Discretionary ..
Food retail is Consumer Staples
But “pet food retail” like Chewy is Consumer Discretionary ..
don’t tell Fido..
Booking,com is Consumer Discretionary sector
Because holidays are discretionary?
Yes, except the airlines people use to go on holiday,
Are in the Industrial sector…
If you’re as confused as me, let’s talk weightings
Amazon & Tesla comprise 40% of the weighting of the Consumer
Discretionary Index
But if Consumer Discretionary offers a clue to the Consumer
You should be very concerned that Tesla’s sales were down 12% last quarter
Perhaps the only thing that’s “Discretionary”
is whether to pay any attention at all to sector classifications
*Ranmore Global Equity Fund has positions in Alphabet & Mattel
Not advice, do your own work
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