Corporate earnings season for the second quarter of 2023 is close to completion now, with most listed companies having reported results. As we look across the major sectors in which we invest, it’s helpful to take a step back and assess some of the important takeaways from this new information. So… what are we seeing?
First, in the US we are seeing some evidence of the ‘aspirational consumer’ weakening and trading down in traditional luxury goods, but higher income consumers are doing just fine and continuing to spend. This is echoed in China, with high income customers continuing to demand luxury goods while the broader mid-level consumer remains a little more trepidatious in spending.
But while there is continued evidence of weaker demand for physical goods in some sectors, demand for experiences and travel remains very strong. One of our investment companies sells catering services to the sports and leisure sector in the US. Management said in the recent conference call: ‘strength is continuing… we’re not seeing any signs of weakness.’ This positive view is echoed by many other businesses we follow. Globally, consumers continue to want to spend on experiences and travelling.
In digital advertising, a major sector theme we play in the Global Trends Funds, we have seen better than expected results, with major digital advertising platforms delivering accelerating rates of growth in demand. This is interesting as it indicates the underlying economy is still relatively solid and not seeing any rapid decline you would associate with a recession just yet. Advertising budgets are quick to be cut if businesses sniff an impending economic slowdown, and we’re not seeing this in the digital advertising space.
In commercial IT spending on cloud computing services, another important investment theme for us, again we are seeing better than expected results. Last year when pessimism about the economic outlook was widespread, the expectation was that sectors like cloud computing would see major slowdowns driven by cuts in commercial IT budgets. This is not happening, with the major cloud service providers all reporting double digit growth in revenues in the quarter ended June.
Retail ecommerce is also seeing a recovery in growth rates from the slowing we saw last year. US ecommerce growth slowed to a crawl last year, as the big online spending boom on goods during the pandemic shifted to spending on services and experiences post-lockdowns. This year growth is coming back in ecommerce volumes and this, again, indicates an underlying economy that is not heading into a recession right now.
Industrial and manufacturing businesses are seeing much more mixed performance, depending on the sector. Some industries like semiconductors continue to see weak demand as the post-pandemic hangover continues. Demand for electronic goods and the semiconductors that power them was extraordinarily strong during the pandemic, as consumers with stimulus money to spend upgraded their laptops, smartphones, TVs, etc. It is taking longer than many expected for this demand to recover.
However, in other industrial sectors we are seeing strong indicators of sustained demand growth, especially in sectors benefitting from increased fiscal support, namely: climate change mitigation investment, energy capital goods, industrial re-shoring / near-shoring, and in Western defence companies. These are big sectors, the fiscal support from governments is considerable and likely to continue give their strategic importance.
Finally, despite the hype around artificial intelligence (AI) we are not yet seeing much evidence of disruption in the sectors where many had been expecting to see it. Large language models are undoubtedly a very interesting technological advance and we expect AI to be a major source of innovative new products and disruption in the future. However, new technologies usually take a lot longer to become adopted and to disrupt. In the meantime, we continue to see opportunities to own businesses which have sold off due to the perception that they will be losers from AI adoption. In some cases, these are strong businesses and are unlikely to be disrupted any time soon.
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