Research and Market Commentary

Global Markets Insights: A cull in retail, investor sentiment improves

July 13, 2020


A “Darwinian cull” is taking place in the retail sector, with 2020 likely to beat a record-setting 2019 for store closures. Our latest quarterly survey, meanwhile, takes the temperature of professional investors on sentiment, asset allocation, sectors and more, and although their mood has improved, concerns linger. Scotiabank analysts weigh in with their latest insights on what the pandemic might mean for retail, foreign exchange and equities.




One cannot overstate the impact the COVID-19 pandemic has had on the retail industry, hastening a Darwinian cull and dramatically altering the retail landscape. North American casualties are mounting at a very fast clip, with more than 8,000 store closures announced so far in 2020, and we’re only at the halfway point of the year. In 2019, a record year for store closures, some 9,500 stores were shuttered for good. The retail sector is well on pace to top that record. Chain retailers filing for bankruptcy in 2020 now total 30, substantially above the 23 filings last year, which was a record year for retail bankruptcies. The second half of 2020 will likely see many other players being forced to file.


As we have noted before, another profound impact of the pandemic has been the significant acceleration of consumer adoption of e-commerce, and nowhere has this been more notable than in the shifting behaviours with respect to shopping for food. According to monthly surveys conducted by the research firm Bricks Meets Clicks, online grocery sales in the US set new records in each successive month since the pandemic began. April online grocery sales grew to $5.3B, a 32.5% increase from March sales of $4.0B. That record was surpassed in May when online grocery sales rose a further 24.5% to $6.6B. Yet another record was set in June when sales in America reached $7.2B, a further gain of 9.1% and a six-fold increase from the online sales level of $1.2B in August of 2019. In the period between August and June, average order size increased from $72 to $84; the number of monthly online orders exploded from 16.1M in August to 85M in June, growing five-fold; the frequency of orders increased from once a month to 1.9 times; and the number of customers grew from 13.1M to 45.6M. This clearly underscores the impact of the pandemic in the move to online grocery sales, and points to the importance for grocers to invest and innovate to keep up with the massive shift in consumer shopping behaviour and expectations.


In Canada, a new online grocery platform was launched on June 22 in the Greater Toronto Area. Voilà by Sobeys is a unique platform that serves customers through a state-of-the-art automated Customer Fulfillment Center (CFC) powered by the Ocado Smart Platform. Ocado has developed an efficient online grocery model based on central fulfillment, proprietary algorithm/AI-based software, and robotic-led hardware. The Voila CFC is the first of its kind in North America. Robots assemble orders, resulting in enhanced efficiency and minimal product handling. The CFC can hold more goods than a typical store and all but removes the key pain points of online grocery – out of stock items and substitutions – thereby providing a better customer experience. Ocado facilities say they have delivered 99% order accuracy. Voilà is going to be watched intently by other grocers and investors. Should online grocery in Canada continue to grow beyond the pandemic, which we believe is likely, Sobeys’ inking of a deal with Ocado in 2018 will prove quite fortuitous. (See a full report on the Ocado platform here.)


 —  Patricia Baker, Director, Retailing, Global Equity Research




Our quarterly professional investor survey concluded July 6. After an impressive run in asset prices, the timing was perfect to take their pulse. Highlights:


Not out of the woods yet: Although investor sentiment improved (75% redeployed into equities in the last three months), some concerns remain. First, very few expect a V-shape recovery (14%), with most anticipating a W-shape (46%) or U-shape (31%). In addition, the steep run-up in asset prices leaves investors divided in their outlooks: over half (58%) expect equities to be flat to up in the second half of 2020 vs. 42% who expect some weakness (only 6% expect a re-test of the lows).


Dry powder remaining: Interestingly, less than one-third (28%) checked the “fully reinvested” box, leaving a large percentage of investors with some cash waiting to be redeployed and suggesting market weakness could be quickly bought.


Source of funds and shopping list: Cash and bonds were the main source of funds recently. Those who redeployed early bought Tech and cyclicals, while those who have not redeployed yet would favour more value-oriented sectors (less Tech and more Financials).


Asset allocation: Investors increased exposure to Equities – and Corporate Bonds to a lesser extent – in the last three months, while trimming Government Bonds and Cash. In fact, our Government Bonds diffusion index has not hit such low levels since 2016, suggesting rising negative views on the asset class (price down, yields up).


Regional allocation: Canadian and U.S. equities were the main beneficiaries, while exposure to Emerging Markets/Latam declined. It's worth highlighting our EAFE (Europe, Australasia, Far East) exposure diffusion index reached its highest level since the end of 2017.


Sectors: Technology garnered the most votes for sector most likely to outperform in the next 12 months. Investors could provide two picks, so Financials comes behind Tech on a combined basis, but Materials got more "first pick" votes than Financials. It's worth mentioning that Utilities dropped significantly compared with our previous poll and is now seen as the least likely sector to outperform.


 —  Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research


Foreign Exchange


FX markets generally moved against the USD during the week as markets shrug off the risks to the outlook from rising COVID-19 cases in the US South and West, with containment measures announced by leaders still falling well short of a return to strict quarantine. While US coronavirus cases continue to climb at a precipitous pace – with daily increases roughly between 50k and 60k – there is some cautious optimism given that casualties have not greatly increased, although hospitals in certain regions are operating at full capacity, highlighting the need to re-impose some virus suppression measures.


In spite of increasing contagions in the US, which have led to an (as-of-yet minor) reversal or stalling in some high-frequency indicators, and building US-China tensions over the latter’s Hong Kong security bill and its compliance with its phase one trade deal purchase commitments, markets remain in an optimistic mood thanks to strong monetary and fiscal support that will continue to weigh on the USD, particularly against high-beta FX. As the month progresses, some uncertainty may build over discussions in US Congress regarding the country’s next stimulus bill with supplementary unemployment benefits scheduled to lapse at end-July.


The risk-on mood since late-June has not been enough to take the Canadian dollar out of its narrow trading channel, with USDCAD trading between 1.35 and 1.37 roughly since early June, with the past week’s price action further constrained inside 1.3525-1.3625 for the most part. Firm, but stable, crude oil prices that have seen WTI oil hold around the $40/bbl mark for over two weeks has further dampened CAD volatility. Still, we feel that these developments leave the CAD rather undervalued fundamentally and prone to a little more strength if they persist. The Bank of Canada’s meeting next Wednesday – where no policy changes are expected – will be the main calendar risk for the CAD in a week where the currency looks set to otherwise follow the broad market tone.


—  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist




For Scotiabank, Global Banking and Markets Research Analyst Standards and Disclosure Policies, please visit www.gbm.scotiabank.com/disclosures.


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