In this week’s update, Alex Chambers from our discretionary investment management team in Guernsey looks at how companies who were prepared for the digital world have fared well during the global pandemic.

With the consumer discretionary sector putting in a surprisingly strong run since the market lows in March, we thought this week we would look at why that was, and how the stocks we like in that space have fared.

The sector’s performance this year has been a bit of surprise as it is not a natural pandemic winner. Companies in the discretionary sector are those that sell goods and services that are considered non-essential i.e. cars, entertainment or luxury items to name a few. Consumer discretionary tends to be more cyclical when compared to consumer staples, which in contrast focuses on essential items of which people make repeat purchases.

There have been some standout contributors within the sector from companies that have been making regular headlines such as Amazon and Tesla. These two stocks, largely because of their market capitalisation and strong performance, have made up 40%* of the sector’s gains since the lows. It is no secret that Amazon, and online retail more generally, have benefitted from shoppers being at home with traditional retail suffering for most of the year.

While the likes of Amazon explain some of the sector’s strength, other stocks in the segment have also held up well. Luxury goods company LVMH and sports giant Nike are core holdings in our Global Blue Chip strategy’s discretionary allocation and these stocks have also been beneficiaries of the sector’s strength this year. While these stocks might not seem likely obvious beneficiaries of online shopping; one of the reasons we like them is the good work they have been doing in recent years to embrace the shift to digital by consumers.

LVMH has by no means escaped the financial impact of the crisis however; profits took a hefty 68%** hit in the first half and this was worse than analysts had expected. China and Japan, both significant markets for the company, have however provided a much needed boost to sales as their COVID-19 numbers remain relatively low at present. China has long been the brand’s fastest growing market and this has only accelerated with fewer Chinese travelling and making purchases overseas. Although it is the largest luxury goods brand in the world, the company runs at a very low level of inventory in order to remain nimble and adapt to market changes as well as reducing the risk of being stuck with out of fashion items, ultimately leading to waste.

Nike is also a quality business with a world class ‘D2C’ (direct to consumer) platform that continues to drive sales during a time where traditional retail sales are severely dampened. This sales channel is likely to be a key driver for the brand going forward. Another strong point for Nike is that the company’s shoe technology is right at the forefront of the industry. We note that a few athletes, despite being sponsored by other brands, are choosing to use their shoes while covering up the tell tale Nike ‘swoosh’. During the first half of the year, the company also made Nike Training Club free for a period of time and this serves to entice customers into the Nike ecosystem and improve engagement with its members. Ultimately, our investment philosophy is based on the idea that high quality, well run, companies that are always striving to get better are one of the best ways to invest for the long term. While markets can be fickle in the short term, in the longer run the quality of these types of firms shines through and is eventually rewarded delivering returns for investors. While nobody saw the pandemic coming, we are pleased to see that the market is rewarding companies like Nike that have taken steps to prepare themselves for the new world of digital in which all retailers must find their place.

* Based on total return in sterling from 23rd March to 27th August 2020 for the MSCI World Consumer Discretionary Sector Index constituent data ** Company accounts