Weekly Investment Update (11/18/2022)

Our next Weekly Investment Update will be on December 2. We wish you and your families  a warm and healthy Thanksgiving.

Retail Sales and Earnings Point to Continued Consumer Strength

Consumer spending remains resilient amid a weakening economic backdrop. U.S. retail sales rose 1.3% in October, the largest increase in eight months and ahead of consensus expectations. The retail sales control group that excludes autos, building materials, and gasoline rose 0.7%. This is an especially important component because it feeds into GDP. Markets sold off on the strength of this report, since investors are well aware the Fed is looking for cooling in economic data to slow its hiking cycle. Areas of strength in the retail sales report included groceries, gas stations, and restaurants as demand for essentials and services remained robust. Discretionary areas painted a more mixed picture with general merchandise and sporting goods declining, while e-commerce, autos, and furniture advanced.

The underlying details of the October retail sales report correspond with recent retail earnings. Commentary from earnings season supports that consumers are shifting their dollars from discretionary goods to experiences and essentials, two areas that also are taking more of their wallet share due to inflationary pressures. For example, Walmart, a Bessemer holding, saw an increase in transactions and ticket sizes for overall purchases. Walmart’s earnings were supported by strength in grocery revenue, which more than offset the pullback in discretionary spending. On the other hand, Target’s revenue is more exposed to discretionary purchases, and as a result, the company’s earnings were negatively impacted. Bessemer portfolios have decreased exposure to the consumer discretionary sector since the start of the year due to an anticipated pullback in discretionary purchases.

President Biden Attended the G20 Summit, Where He and President Xi Met Face to Face

Highlights from the G20 Summit included the condemnation of Russia’s invasion of Ukraine as well as a highly anticipated in-person meeting of President Biden and President Xi. In a symbolic diplomatic victory for the U.S. and its NATO allies, the customary G20 joint communique at the conclusion of the summit included language denouncing the war in Ukraine and the use of a nuclear weapon as "inadmissible." The condemnation was notable in that it was marked by a shift in tone from China and India — two countries that had previously been reluctant to criticize Russia’s invasion of Ukraine. Noticeably absent among the leaders present this year was Russia President Vladimir Putin, further isolating Russia from the global community as the war in Ukraine continues.

President Biden's G20 agenda also included a highly anticipated face-to-face meeting with China’s President Xi Jinping, the first time they have met in person since Biden took office last year. The meeting came as relations between the two powers have been challenged following House Speaker Nancy Pelosi’s August trip to Taiwan, which prompted China to halt nearly all communication with the U.S. government and conduct massive live-fire military exercises around Taiwan.

Despite recent tensions in Sino-U.S. relations, the two leaders expressed a joint desire to resume and increase communication between the two governments. The White House stated that "the United States and China must work together to address transnational challenges…" and that "competition should not veer into conflict." Meanwhile, Beijing characterized the conversation as "candid, in-depth, and constructive" — warmer language than has been used to describe other recent meetings between the two leaders. While vast differences between the U.S. and China persist, the meeting’s outcome has been broadly viewed as a positive development as increased stability in the world's most important bilateral relationship is likely to be viewed favorably by markets, even if it is a temporary phenomenon.

China Announces Incremental COVID Policy Easing

Last Friday, the Chinese government announced measures to ease and refine its COVID restrictions while keeping its COVID-Zero policy in place. The Chinese government released 20 new measures to refine COVID restrictions including slight easing of quarantine rules, relaxing inbound travel restrictions, and moderating restrictions for “risk areas.” Notably, the Chinese government announced the easing of restrictions coming into the winter, a time during which COVID cases tend to surge. Though it is possible to see intermittent lockdowns in some cities, possibly in a more targeted way relative to broad lockdowns, this policy easing could help lead the way to future easing of China’s stringent COVID policies. China’s COVID-Zero policy is unlikely to be a binary switch but rather occur incrementally as the country looks to accelerate vaccination and improve medical protection for vulnerable groups.

Though China’s recovery could be bumpy, over the next year, easing policy restrictions could lead to increased consumption in the country and support growth in the Asia region through improved trade dynamics. South Korea, an export-reliant country, has seen its export growth rate decline in October for the first time in two years, in part due to weakened trade with China. While China’s reopening could improve the global growth outlook and trade dynamics, we continue to monitor whether these incremental easing measures will lead to a larger and more sustained policy response. Bessemer’s All Equity Model Portfolio remains underweight China relative to the benchmark.