Research and Market Commentary

Global Markets Insights: Lockdown retail winners and the equities rebound

June 15, 2020

 

The pandemic lockdown has created a boost in certain activities – gardening, DIY projects, cycling – that are benefitting certain retailers, while others look to a more physically contained future. The CAD, meanwhile, benefits from the rebound in equity markets, and there is reason to see value beneath the surface of the equities rebound.

 

We asked Scotiabank analysts to weigh in with their latest insights on what the pandemic might mean for retail, foreign exchange and equities.

 

Retail

  • As data starts to suggest that Canada is beginning to flatten the curve, some provinces have started to loosen restrictions and are announcing return-to-work plans. Most will be rolling out in phases and we have seen non-essential retailers being given the greenlight to open. Of course, the plans will vary by province. Retailers have much to consider during the pandemic’s recovery phase. It will be a phased affair with safety front of mind; some doors may not reopen at all. There is no doubt COVID-19 accelerated a shift toward having a smaller physical presence and there have been a slate of announced physical store downsizing efforts. The latest comes from Starbucks, which will look to close 200 locations in in Canada over the next two years.

  • There is strong anecdotal evidence that certain categories are witnessing a pronounced pandemic/lockdown-related boost. These include outdoor living, especially gardening supplies. Scotts Miracle-Gro (NYSE:SMG), the world’s leader in consumer lawn and garden products, has moved its sales growth for F20 to a range of 16-18% from guidance in May for 6-8% growth, while EPS guide moved to a range of $5.65-$5.85 from $4.95-$5.14.  Consumer purchases of SMG products at their four largest retailers rose 44% in May and are up 19% YTD.  This reflects an unprecedented number of consumers planting and maintaining gardens. Dollarama indicated on their Q1 earnings call that the start of Q2 is seeing good momentum in spring/summer seasonal categories, especially gardening.

  • Likewise, we are seeing long lineups at bicycle shops. The reason for this is likely twofold. As most gyms remain locked down, cycling provides a physical outlet to enjoy the outdoors and it lends itself to social distancing. In addition, we believe the demand is also being driven by a reluctance to return to public transport, and people are looking at cycling as the solution for their commute. This latter dynamic is also playing a role in the recent rise in used car sales. According to Canadian Tire, the country’s largest bicycle vendor, they have seen unprecedented sales of bikes and accessories this spring. Recent data released in the UK on consumer spending for the month of May called out bicycles and related equipment up significantly year on year. In the US, Dicks Sporting Goods (DKS) noted anything to do with the outdoors continues to do well and they anticipate that will continue.

  • The lockdown has also spurred people to complete home projects, and as such the DIY category is seeing outsized growth. DIY was also called out as a strong category in the May UK consumer spending data. When we look at the US market the YTD performances of the two companies with the largest exposure to DIY, HD (+16 %) and Lowe (+8.5%), this market outperformance does reflect strong trends in the business. Both referenced DIY strength in recent conference presentations. Strong comp trends in Q1 (SSS HD +6.4%) (LOWE+12.3%) were underpinned by solid sales in the category. Consumers are taking on incremental projects as they spend so much more time at home and see on a daily basis the things that need to be fixed.
     

—  Patricia Baker, Director, Retailing, Global Equity Research
 

Foreign Exchange

  • Currency markets remain largely influenced by the binary consideration of whether broader investor risk appetite is positive or negative – whether market conditions can be characterised as “risk on” or “risk off,” in other words. This situation is effectively conditioned by whether equity markets are rising or falling at any given point. Investors are paying scant attention to economic data as drivers of currency performance at the moment. In bouts of “risk on” trading, the commodity and growth-sensitive currencies like the CAD or MXN tend to outperform versus their peers. Equally, when stock markets are declining, these same currencies tend to underperform. 

  • The strong rebound in US equity markets since the March low has helped lift the CAD significantly against the USD. In fact, with the USD falling in the immediate wake of the Fed’s policy decision on June 10, the CAD has now recovered more than three quarters of the losses registered against the USD between January and March. Additional CAD gains seem likely in the near to medium term as the USD appears poised to weaken more broadly against the G10 currencies, with the Fed indicating that interest rates are unlikely to rise until at least 2022.    

  • We have maintained a relatively constructive view on the CAD outlook since late March and last week we reduced our year-end forecast for the USD versus the CAD to 1.32 (from 1.38). We think near-term rebounds in the USD are likely to be limited to the 1.36/1.37 range.    
     

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

Global Equities

  • Powerful S&P 500 rally hides value beneath the surface. Recent equity gains were all about the progress made on the pandemic/vaccine front, the re-opening of economies and stimulus measures. Central banks literally flooding the market with liquidity and brushing off worst-case scenarios also acted as a powerful backstop. Short-covering and retail investors’ appetite for stocks have also contributed to push equities faster and higher than we had anticipated. Still, we believe that, on balance, the risk-reward favours a continuation of the recovery in stock prices for five reasons:

  • The S&P 500 is not the “average” stock. As we indicated recently, we often use the S&P 500 as a gauge for the entire market, but the S&P 500 is not the “average” stock. Until recently, the S&P 500 was pulled higher by a small group of mega cap stocks, leaving the “average” stock trailing well behind. Small caps and ex-USA equities are also lagging the S&P 500 by a distant margin YTD, leaving room for improvement.

  • “Less bad” is positive. With a re-opening process slowly starting around the world, macro data should only improve from here. Hence, weak but improving macro data could continue to provide support for stocks.

  • Liquidity floodgates wide open. The Fed is clearly all-in at this point and stated that there’s really no limit to what it can do. It helps understand the size of the Fed liquidity injections so far in comparing the size of its balance sheet relative to nominal GDP. At current level and assuming a decent haircut to Q2 GDP, the percentage will easily reach the 35%+ level. The BoC balance sheet is also expanding briskly relative to GDP.
  • Don’t fight the tape. The percentage of stocks in the S&P 500 trading above their 200-d line tends to climb well in excess of 80% after a major equity selloff. At around 60% currently, that percentage remains relatively low, leaving more room for improvement.

  • FY 2020 EPS decline almost fully priced-in. We think bottom-up estimates reflect the earnings damage, for the most part. We note that the pace of negative earnings revisions has started to moderate recently, with EPS revisions ratios improving slightly from a low base. Whether S&P 500 earnings decline by 23%, 25%, or even 30% this year won’t influence stock prices much at this juncture. Investors are already looking through 2020, with stocks trading on more “normalized” earnings outlook in 2021/2022.

  • Conclusion: We think the market could remain more or less risk-on throughout the summer as macro data improves. While overall markets may face more upward resistance, a rotation toward laggards, such as cyclicals, smaller caps and value stock could still deliver strong equity gains. Still, the shape of the recovery (V, W, U, or L) will only be known by late summer or early fall, once the reopening phase is completed. Investors should be ready to taper down risk if “back to school” doesn’t imply “back to work” for most workers as well.
     

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

 

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

 

 

 

 

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