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1 DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright2016TheFungGroup.Allrightsreserved.
JUNE24,2016
BREXIT: FIRST-TAKE ON THE IMPACT FOR RETAIL
SterlingandEuropeanstockmarketswererockedbythevotefortheUKtoleavethe European Union. On the eve of the result, traders had expected the UKelectoratetovotetoremainintheEU.
In2017,UKGDPgrowthislikelytobebetween1%and1.5%lowerthanitwouldhave beenhad the vote gone the otherway. Butmajor banks do not forecast arecessionfortheyear.
In 2017, consumer prices are likely to be pushed up by a weaker pound, buteconomistsaredividedonthelikelyscaleoftheserises.
Weexpectretailsalesvolumestosoftenduetoweakerconsumerdemand,butthevalueofretailsaleswillbesupportedbyraisedinflation.
We expect this raised inflation to feed primarily into nonfood retail, given therelianceonimportsinnonfoodcategoriesandgiventhatstrongpricecompetitionwilllikelypersistinthegrocerysector.
THE UK VOTES FOR BREXIT
On June23, theUKvotedbya52%majority to leave theEuropeanUnionona voterturnout of 72.2%, the highest turnout in a UK national vote since 1992. In this flashreport,wesummarizetheimmediateimpactsofthevoteandlookatthemedium-termeconomicoutlook,withafocusontheimpactontheretailsector.
ThisreportisbeingwrittenonthemorningofJune24.ThevotefortheUKtoleavetheEUhitEuropeanstockmarketsandtheBritishpoundhard.Theeffectwasamplifiedby
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2 DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright2016TheFungGroup.Allrightsreserved.
JUNE24,2016
traders who confidently priced in a Remain vote on the day of the referendum. ThisexpectedvotewasapparentlydrivenbyopinionpollsthatshowedaleadfortheRemaincampaignandtheoddsonaBrexitofferedbybookies.
Atthetimeofwriting,theoverridingsentimentisoneofuncertainty,andweexpectthistocontinueforsometime.ThisuncertaintyisoverthetimescaleoftheexitfromtheEU(oreventheformalnotificationtotheEUoftheUKsplantoquit)andthenatureofthatexit.PrimeMinisterDavidCameronwillstepdownbyOctober2016,withhissuccessorlikelytoleadtheexit.
EvenaftertheUKhasadvisedtheEUofitsintentiontoleave,ithasuptotwoyearsinwhichtonegotiateandcompletethatprocess.Thisaddsgreatuncertaintytoestimatingtheoutlookforindustries.
SHORT-TERM IMPACTS
Allpartiesexpectedavote forBrexit tohavean immediate impacton thepoundandstocks,andwecertainlysawthat:
TheBritishpoundinitiallyfellbyaround10%againstthedollar,butatthetimeofwritinghasrecoveredalittletoaround7%down.
The FTSE100 Index initially fell by around6%,but at the timeofwritinghasrecovered some lost ground and is down around 4%.On a one-month basis,however,theindexisdownbyonly1.7%.
The FTSE 250 Index initially fell by around 12%. One a one-month basis, theindexisdownbyaround6%.
The FTSE 350 Index of General Retailers initially fell by around 12% beforerecovering,andisdownbyaround9%.
Major UK retailers slumped after the market opened, with discretionary-category retailers hardest hit:Marks & Spencer was down 19%, Debenhamswas down 21%, Next was down 25%, Sports Direct was down 27%, DixonsCarphonewasdown30%andWHSmithwasdown31%.
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3 DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright2016TheFungGroup.Allrightsreserved.
JUNE24,2016
MEDIUM-TERM EFFECTS
GDPGrowthSettoWeakenButRemainPositive
NobodyknowstheextenttowhichBrexitwillimpacteconomicgrowth,soeconomistsforecastsfor2017rangefrompositivebutweakergrowth,toarecession.
Citi forecasts that in2016and ineachof theyears to2020, therewillbeahit to realGDPgrowthofbetween1%and1.5%.Thebankdoesnot,however,forecastarecessiononanannualbasis,withrealeconomicgrowthofaround1%ineachyear.
Figure1..CitisForecastUKRealGDPGrowth(%)
Recreatedfromagraphprovidedwithoutabsolutenumbers.
Source:CitiResearch
INGforecastsGDPgrowthtoslowto1.5%in2017,some1.2%belowwhattheyexpectitwouldotherwisehavebeen. In2018, INGexpects thisdownwardpressureonGDP toreducetoaround0.7%.LikeCiti,INGdoesnotexpectarecessiononanannualbasis.
0.0
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2015 2016E 2017E 2018E 2019E 2020E
Remain Brexit
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4 DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright2016TheFungGroup.Allrightsreserved.
JUNE24,2016
Figure2.INGsForecastUKRealGDPGrowth(%)
Source:ING
The Economist Intelligence Unit (EUI) forecasts a 1% fall in real GDP in 2017. Thiscompares to a +2.24%GDP forecast by the IMF prior to the Brexit vote. In turn, thisimpliestheEIUexpectsaswingofmorethan3percentagepointsineconomicgrowth,whichseemsundulynegativetous.
Consumer Prices Expected to Rise
Overthemediumterm,anexpectedweakerpoundwillpushuptherateofconsumerpricesinflation(CPI).However,economistsaredividedonthescaleoftheserises.
CitiestimatestheBrexitvotecouldaddaroundtwopercentagepointstoUKCPIineachof2017and2018,andpushitupfrombetween1%and1.5%tobetween3%and3.5%.
The EUI expects consumer prices inflation to be only slightly above the Bank ofEnglands2%targetinboth2017and2018.
INGexpects inflationtobepusheduponlymodestly: in2017, INGexpects inflation intheBrexitscenariotobe3.2%versus3.0%fortheRemainscenario.
1.01.21.41.61.82.02.22.42.62.83.0
2016E 2017E 2018E 2019E
Remain Brexit
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5 DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright2016TheFungGroup.Allrightsreserved.
JUNE24,2016
Figure3.INGsForecastUKCPIGrowth(%)
Source:ING
Retail Growth Likely to Soften
The risk of Brexit to retail and other consumer-goods industries comes from twosources: first, uncertainty on the timescale, shape and effects of exit from the EU;second,anydeleteriouseconomicimpactsofthatexit,orfromtheuncertaintyaheadofit.
TheEUIforecastsreal-termsretailsales(i.e.,volumes)couldfallbyaround3%in2017,comparedto+2%inthecaseofaRemainvote.Thiscomparestoareal-termsincreaseofaround4%ineachof2014and2015,andaveragereal-termsgrowthof4.4%overthe
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6 DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright2016TheFungGroup.Allrightsreserved.
JUNE24,2016
firstfivemonthsof2016,accordingtodatafromtheOfficeforNationalStatistics(ONS).Giventhiscontext,weviewtheEUIs forecastsasexcessivelypessimistic:wesee littlereasonforanapproximate7percentagepointswinginretaildemand.
Our firstestimatesare that theBrexit votecoulddent retail salesgrowthbybetween0.7% and 1% in each of 2017 and 2018.We show our first estimates for retail salesgrowth below.We base these on INGs expectations for GDP growth and CPIsomeelements of which take a conservative view of the Brexit effect relative to otherforecasts, such as those from Citi. Our figures are for retail sales growth in currentprices.
RetailvolumesarelikelytobesoftenedbymacroeconomiceffectsoftheexitfromtheEU. Yet raised inflation is expected to boost the value of retail sales in current-pricesterms.
Figure4.UKYoYRetailSalesGrowthEstimates
RetailValueGrowth:Remain
Scenario(%)
BrexitInflation
Impact*(%)
EstimatedBrexitVolumeImpact**(%)
RetailValueGrowth:Brexit
Scenario(%)2015 1.9 0.0 0.0 1.92016E 2.2 0.0 (0.5) 1.72017E 2.7 0.2 (1.2) 1.72018E 2.7 0.4 (0.7) 2.4
*ThedifferencebetweenINGsRemainandBrexitscenariosforCPI.
**We use the difference between INGs Remain and Brexit scenarios for real GDP growth as aproxyfortheimpactonrealretailgrowth.
Source:ONS/ING/FungGlobalRetail&Technology
We expect any inflationary pressures to be weighted toward nonfood retail for tworeasons. First, nonfood categories relymuchmoreon imports,whichmeans currencyeffectsarestrongerthan infoodcategories;second,weseetheongoinggrocerypricewarsaslimitingthepotentialforsolidpositivefood-priceinflation.
Figure5.PositiveandNegativeForcesinUKRetailValueGrowth
Source:FungGlobalRetail&Technology
Weakerpoundpushesupshopprices
Consumercaukonhitsdiscrekonary-purchasevolumes
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7 DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright2016TheFungGroup.Allrightsreserved.
JUNE24,2016
DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalyst
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