（Bloomberg) -- After shunning consumer discretionary stocks for most of 2022, a top-performing US fund manager is betting on a recovery in the beaten-down sector on the back of a strong labor market.
Aaron Dunn, whose Eaton Vance Large-Cap Value Fund, has dropped only 4% this year compared with a 19% decline in the S&P 500, said that unlike in a typical recession, US jobs growth continues to be resilient. That should support consumer spending more than “the market is currently willing to price into many of these stocks,” he said.
The sector made up just about 3.6% of the fund’s holdings by end-September, but Dunn has beefed up exposure in the fourth quarter and said he sees “the opportunity to own a sizable overweight.” He declined to disclose the stocks he’s bought recently, but pointed to retailer Dollar Tree Inc. as an example where he sees value. He also said toymaker Hasbro Inc., in which the fund recently took a small position, had “substantial upside.”
The fund, with $1.7 billion in assets under management, has beaten 79% of its peers in 2022, helped by investments in the energy and materials sectors, according to data compiled by Bloomberg. Its top holdings include Wells Fargo & Co., ConocoPhillips, Chevron Corp. and NextEra Energy Inc. as of Sept. 30, according to a factsheet.
US consumer discretionary stocks including Tesla Inc. and Amazon.com Inc. have been hammered this year as runaway inflation ate into consumer savings built up over the Covid pandemic. The S&P 500 consumer discretionary index has dropped 35% in 2022, tracking its worst performance on record.
The economic outlook for next year isn’t much better as investors worry that a staunchly hawkish Federal Reserve could spark a downturn. But even if corporate America announces increased layoffs, “a shorter, sharper recession” should have them re-hiring employees at a faster pace, Dunn said.
The fund manager sees a contrarian opportunity in apparel retailers, saying they’ve experienced a sharp earnings reset this year and “that’s somewhere we could see consumers boost spending.” Still, he said it was too early to buy into those stocks as “there are likely more negative stories that will emerge in the short-term. This is an emerging opportunity and an area we will be watching closely.”
Dunn also expects the outperformance by more traditional value stocks to continue in 2023. The group has led so-called growth shares this year by the most since 2000, benefiting from a jump in bond yields. Although market participants expect yields to drop next year, Dunn said prospects for higher-for-longer inflation mean the outlook for financials and some commodity equities is brighter than it has been for several years.
The fund manager flagged industrials, basic materials and aerospace stocks as having opportunities next year. Chipmakers could also benefit in the second half as global supply chains re-open, he said.
(Source : Bloomberg) , all rights reserved by original source.
