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Which ASX 200 shares could benefit from falling consumer confidence?

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Consumer confidence is down as rising inflation and interest rates push up the costs of living.

ASX 200 share price movements are reflecting these concerns. The benchmark S&P/ASX 200 Index (ASX: XJO) has fallen 14% year to date.

As my Fool colleague Mitch reported last week, the latest Westpac-Melbourne Institute consumer sentiment index fell by 4.5% from the prior quarter to 86.4. A reading below 100 indicates pessimism — and the lower it goes, the more uncertain and cautious people are feeling.

Westpac chief economist Bill Evans said the June figure was not far off some of our worst financial periods. This includes COVID-19 (75.6) and the global financial crisis (79).

So in other words, Aussies are feeling pretty down in the dumps, economically speaking.

Supermarkets usually do well during periods of inflation, says Will Riggall, the chief investment officer at Clime Investment Management.

In a recent interview with the Australian Financial Review (AFR), Riggall said:

The segment of the market that has historically performed well during periods of inflation are the Australian supermarket players, namely Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL).

While we may see some trading down to lower-priced items, consumers will continue to buy food and other goods. The size and strength of the big two players will see margins remain stable amid a more challenging environment for the broader consumer sector.

Consumer staples over consumer discretionary

As Mitch also reported, consumers are now putting off household purchases. The ‘time to buy a major household item’ sub-index slipped 3.3% to 89.5 in June. Such a number has only been recorded prior to a severe economic contraction.

In a new note, Bell Asset Management says consumer discretionary shares face more risk than consumer staples with pricing power.

Bell Asset Management said:

At present, the economy remains on a reasonably strong footing, but there is an increased
risk of reduced consumer discretionary spending as priorities of the household wallet shift
more toward essential purchases of fuel, utilities and food.

Bell says investors often overlook company fundamentals and indiscriminately sell their ASX shares.

We are very cautious since our research and modelling shows that the magnitude of earnings downgrades will likely increase in the second half of the year.

Poor quality companies will take the brunt of the fall, whereas quality companies with pricing power will be far better placed to outperform.

As active stock pickers, it is times like this where there are large disconnects between quality and value, often making an opportune time to buy out of favour stocks.

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