Consumer discretionary stocks represent the fourth-largest sector allocation in the S&P 500, commanding nearly 10% of that index. That’s somewhat prominent, particularly when factoring in brand recognition enjoyed by some of the largest consumer cyclical names. But investors shouldn’t sleep on ex-U.S. consumer discretionary opportunities.
Those can be accessed with various exchange traded funds, including the VanEck Morningstar International Moat ETF (MOTI). MOTI tracks the Morningstar® Global ex-US Moat Focus Index. The fund devotes nearly 20% of its weight to consumer discretionary equities. That’s the fund’s largest sector exposure.
MOTI holds stocks from nearly 20 countries, a deep geographic bench. This means some of its consumer cyclical holdings are developed market firms while others are based in emerging markets. Geography aside, the important theme as it relates to MOTI’s consumer discretionary exposure is that the ETF is home to some of the top ex-U.S. names.
MOTI’s Marvelous Consumer Discretionary Holdings
Among the highly-rated consumer cyclical names held by MOTI is Carnival Cruise (CCL). The company is the largest cruise ship operator in the world. The stock was battered when ships were docked during the early stages of the coronavirus pandemic. However, it has been on an impressive redemption story over the past several years.
“Since consumers resumed cruising in the summer of 2021 (after a year-plus no-sail halt), cruise operators have been able to reassure passengers of both the safety and value propositions of cruising, all while offering a holiday product at 25% to 50% less than land-based alternatives. We expect this discount to shrink over time, bolstering pricing growth as Carnival lifts pricing toward parity aided by the firm’s brand intangible asset,” noted Morningstar analyst Jamie Katz.
German automotive giants Mercedes-Benz Group Ag and Bayerische Motoren Werke Ag (BMW) both reside in MOTI. They are also among Morningstar’s preferred international consumer discretionary names. Both companies produce aspirational vehicles geared toward affluent customers who can afford premium pricing. That’s pertinent because those buyers are usually more resilient during sluggish economies.
“Even so, premium brands like Mercedes-Benz limit exposure to downturns suffered by mass-market auto companies because wealthier customers’ spending is less sensitive to recessions. Global population growth of high-net-worth individuals has averaged 5%, increasing Mercedes’ addressable market faster than the 1%-3% rate we estimate for long-term global light-vehicle demand growth,” observed Morningstar’s Krzysztof Smalec.
Though not mentioned by Morningstar, another undervalued MOTI consumer discretionary holding is Wynn Macau. The casino operator is pivoting away from a reliance on VIPs with some analysts projecting added market share. Consensus holds that Macau gaming equities are deeply undervalued even as operators are inching toward gross gaming revenue (GGR) figures last seen before the coronavirus pandemic.
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