In Brief: Supermarkets, Pandemic Benefits & Global Growth

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In Brief: Supermarkets and their landlords; pandemic lifts the Australian economy & global growth concerns.

Weekly broker wrap:

-Alternate ways for investors to benefit from food inflation
-The pandemic’s gift to the Australian economy
-Will the eurozone join the US in a technical recession?

By Mark Woodruff

Alternate ways for investors to benefit from food inflation

June data from the Australian Bureau of Statistics show food inflation was more than 5% for June, with the rate of increase accelerating.

Brokers suggest investors may capture benefits of this rising inflation by holding either ASX-listed supermarkets or their landlords.

Jarden remains overweight the grocers and continues to see upside to FY23 consensus forecasts.

Apart from rising food prices, the supermarkets will benefit from lower consumer confidence and more eating at home, and the analysts see a scenario in which the Australian grocery market can grow at greater than 6% year-on-year through FY23.

This rate of growth is well ahead of FY23 consensus revenue growth estimates for Coles Group ((COL)), Woolworths Group ((WOW)) and Metcash ((MTS)) of 4.9%, 4.7% and 1.8%, respectively, which suggests to Jarden the most potential upside for Overweight-rated Metcash. 

Having recently upgraded forecasts for Australian supermarket stocks, Citi now points to an alternative approach. Investors may also gain exposure via landlords such as Buy-rated Shopping Centres Australasia Property ((SCP)) and Charter Hall Retail REIT ((CQR)), which the broker rates as Neutral.

Both companies have a strong weighting to food sales through grocery-based anchors such as supermarkets.

Retail inflation is supporting continued revenue growth from retail tenants, explain the analysts, and landlords receive delayed benefits via stronger total occupancy cost ratios on rental renewals and increased turnover rent clause growth.

Moreover, Citi points out increased turnover is captured in base rent reviews and an overall stronger shopping centre performance, which benefits surrounding specialty stores.

Jarden feels the share market is not only making zero allowance for market growth for the major supermarkets, but also implying a significant moderation in market share to discounters.

However, the broker feels a swing to discounters is unlikely given relative pricing, the scale of the majors and supply chain issues facing Aldi. In fact, the return of the value shopper is more likely to see private label penetration lift at the majors.

While a rise in private label sales would lower the average selling price metric, an improved gross margin would provide an offset, predicts Jarden. It’s thought Woolworths would navigate a more value conscious consumer best, given its higher online share and data capabilities to enable effective promotions.

The pandemic’s gift to the Australian economy

Following a weak decade of economic performance, some structural shifts brought on by the pandemic should stand Australia in good stead, according to ANZ Bank.

If inflation is sustained at higher levels in Australia, the bank expects higher levels of employment and investment, resulting in stronger economic growth.

The dramatic policy response during the pandemic might have spurred on inflation, but it also changed the baseline, notes ANZ. 

Already, capital expenditure plans for the year ahead are the highest in nearly thirty years. Unemployment is also the lowest in five decades, while consumer spending has risen 9% above pre-pandemic levels.

Additionally, capacity utilisation in the business sector has attained highs only seen prior to the GFC, and the household sector is in the best shape for two decades, with aggregate household debt (net of liquid assets) the lowest in 15 years.

Prior to covid-19, many governments around the world preferred excess unemployment to excess inflation, fearing expectations for the latter might become entrenched. However, the bank notes unemployment can also become entrenched, and combined with less visible underemployment, contribute to inequality.

This inequality leads to lower economic growth and exacerbates financial vulnerability, because those on higher incomes tend to save more, reducing consumption, while those on lower incomes tend to borrow more, explains ANZ.

Will the eurozone join the US in a technical recession?

Data published last week confirmed the US economy shrank for a second consecutive quarter.

Now, more than 60% of participating companies in July’s global risk survey, conducted by Oxford Economics, see a chance of the eurozone following the US into technical recession in the next 12 months.

The survey indicates businesses are becoming increasingly concerned about the impact of rapid central bank policy tightening on global growth. 

The mean expectation for world GDP in 2022 now stands at 2.1%, down from 2.4% in the June survey, and 1.5 percentage points lower than the level anticipated prior to the Ukraine war. For 2023, the mean expectation has fallen to 2.2%, down from 2.4% in the March survey.

The Global Business Sentiment Index compiled by Oxford Economics also indicates the average expectation by businesses is for world GDP in 12 months' time to lie -3% below the level forecast before the outbreak of covid.

Returning to the survey, some upside from lower growth expectations is expected by respondents, due to a weaker near-term outlook for inflation. An inflation rate of 4.3% is expected, a fall of -0.3ppts from what was expected three months ago. Also, the perceived chance of very high (over 6%) world inflation next year has halved since June’s survey, though there’s still a 20% probability attached to inflation remaining above 4% over the medium term.

The largest upside risk for advanced economies, according to around one third of respondents, is a fall in oil prices. Other perceived upside risks include greater monetary policy support for the global economy, economies learning to live with endemic covid and a willingness by consumers to run down savings accumulated during the pandemic.

As in recent surveys conducted by Oxford Economics, the vast majority expect supply-chain disruptions to persist. While 28% of respondents are unaffected, only 42% of those affected see an end to disruption by mid-2023.

July’s survey also indicates more businesses now feel climate change is the top global economic risk over the medium term, and a small but increasing number cite near-term risk.

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