Outperforming asset manager picks 3 global retailers to short amid a fall in consumer spending

Shares of mass market retailers will fall as profit margins are squeezed, and consumers curtail spending next year, according to Plurimi Wealth’s chief investment officer. Patrick Armstrong told CNBC’s Pro Talks last week that he was betting against Japanese electronics retailer Rakuten , multinational clothing company H & M , and Canadian e-commerce platform Shopify by selling their shares short. Selling shares “short” means borrowing shares through a broker to sell them immediately with a plan to repurchase them when the price is lower. Such investors, also known as short sellers, pocket the difference as profit. Armstrong said that while consumers have shown resilience so far, rising interest rates and a lack of meaningful real wage growth will mean a drop in spending starting next year. In such an environment, mass market retailers that benefit from discretionary spending will see their revenues decline. “Consumers are going to have their purse strings pulled by utility bills, higher mortgage costs, higher petrol prices, and there’s going to be a margin squeeze,” said Armstrong, whose Plurimi AI Global Equity strategy beat the MSCI World index to rise 8.2% in October. “The ‘dream stocks’ which many of the e-commerce stocks were, I don’t think they have a clear path to profitability, and I don’t think they’re going to generate good returns for investors from here.” Shares of retailers such as Shopify rose by more than 350% between April 2020 and November last year after central banks and governments worldwide began trillion-dollar monetary and fiscal programs intended to keep their economies afloat during the Covid-19 pandemic. However, as interest rates have begun rising this year to combat soaring inflation, investors have begun favoring companies with stable earnings, strong balance sheets, and low debt. This has meant companies like Rakuten and H & M have already lost nearly half their values this year. Despite being a growth tech stock, the median analyst price target for Shopify is only 7.4% above the current share price, partly reflecting Armstrong’s concerns, according to FactSet data. While valuations have seen a multiple compression, retailers have largely avoided earnings downgrades. Armstrong believes companies will see revenue contraction in the first half of 2023. Armstrong also said that the challenges facing mass-market retailers are vastly different from those operating in the luxury sector, which is unlikely to see a curb in demand. The chief investment officer revealed he prefers to invest in LVMH and Hermes in that sector. “Companies that are generating earnings, positive cash flow, are the companies that are going to be rewarded in the coming year,” he said. While investors are split over the health of the American consumer, European shoppers are mostly expected to curtail their spending habits next year. “We expect the recession to deepen early next year, as households’ real disposable incomes are hit hard when energy bills support is withdrawn substantially by the government in April,” said Gabriella Dickens, senior U.K. Economist at Pantheon Macroeconomics. Elsewhere in Europe, economists are also expecting a recession for the first half of next year that will impact discretionary spending. “We forecast negative economic growth in the Euro Area from Q4 2022 until Q2 2023,” said the analysts led by Maximilian Uleer, head of European equity at Deutsche Bank Research. “As disposable incomes decline with elevated inflation and limited wage growth, we expect consumer demand to come down in the next months.”