In a low oil price environment, consumer discretionary stocks have found favour among investors, who are waiting for savings from the pump to be deployed in restaurants, at malls, and in movie theaters.
The encouraging outlook for this group has been, to a certain extent, priced in.
Since October, when crude began to hit the skids in earnest, consumer discretionary stocks have been on a tear.
What's surprising, however, is that investors don't seem to be treating consumer-oriented stocks below and above the 49th parallel very differently.
In local currency terms, the S&P/TSX and S&P 500 consumer discretionary indexes have gained more than 15 per cent since the end of September.
And as this chart from CIBC World Markets demonstrates, both indexes have moved in tandem over the past six months:
"Cheaper oil prices have mixed effects for Canadian consumers, as gasoline savings are offset with weaker employment prospects and lower purchasing power by way of a cheaper Canadian dollar," writes CIBC World Markets economist Nick Exarhos. "But a less expensive barrel of oil is a more resounding positive for American shoppers."
The economist also observes that firmer wage growth south of the border makes the forward outlook for U.S. consumer discretionary stocks brighter than those of their Canadian peers.
However, Canadian consumer discretionary stocks, led by Hudson's Bay Company and Dollarama Inc., have actually outperformed the similar U.S. group since October by more than 2.5 per cent in local currency terms.
The composition of these indexes may somewhat skew these results. The U.S. consumer discretionary index is very deep, with 85 members compared to 24 from its Canadian twin, and strikes a balance between apparel firms like Nike Inc., toy manufacturers like Mattel Inc., retailers such as Target Corp., quick-service restaurants like Yum! Brands Inc., and luxury goods makers such as Michael Kors Holdings Ltd.
Conversely, over 25 per cent of the Canadian consumer discretionary index is accounted for by the auto parts manufacturers – Magna International Inc., Linamar Corp., and Martinrea International Inc. – which arguably might be better classified as industrials.
While both are more richly valued than their respective benchmark indexes, by one metric, the S&P/TSX consumer discretionary index is less expensive than its American counterpart. The Canadian consumer group trades at a forward price-to-earnings ratio of 16.3 times, while the S&P 500 consumer discretionary index has a forward P/E of 20.1 times, according to Bloomberg.
Accordingly, Mr. Exarhos concludes, "Though rapid gains seen in the U.S. labour market may not be matched by developments in Canada, there may still be value in consumer discretionary stocks, as TSX investors seek haven amidst the oil rout and a somewhat more muddled Canadian economic landscape."
As many Canadian-listed consumer discretionary stocks generate a significant portion of their revenues abroad, the dimmer forward outlook for domestic consumers does not fully invalidate their growth potential.