SIMON BROWN: I am now chatting with Evan Walker, portfolio manager at 36ONE Asset Management. Evan, I still appreciate the time. We have chatted several times last year; I think the last time was around the middle of the year. If memory serves, it was before the KZN riots in July.
You had been bearish on local retail, but the caveat was government subsidies, the R350. They came back, so parts of the retail business have done pretty well – Shoprite, Dis-Chem, Lewis. Others – Pick n Pay, Spar – not so much. What is your reading on the sector by 2022?
EVAN WALKER: Salvation. Hello. I think it’s a very similar position to last year. We’re pretty cautious. We have Shoprite in the wallet. I think we are looking for stocks where there are still potential market share gains on a competitive basis. But I think it’s going to be a reasonably average year.
We can see that consumers are under [pressure] and, as we discussed last year, there is still a tremendous amount of stimulus in the base. Going back to 2020 now, there are still number one amounts of government stimulus and a lot of sadly paid off cuts that continued last year. So there is a huge amount of one-time money for this, which we’re starting to see come to an end. We’ve seen it in a lot of discretionary-type money, such as trade updates from Cashbuild, numbers from Massbuild and the like in some of the commodities now, where discretionary-type money has been hit hard. . We still think it’s going to be an average year for the non-discretionary money of retailers, grocery retailers, etc. We’ve seen slightly higher food inflation creep into the system now.
We just spoke with Wayne [McCurrie] global inflation with similar dynamics in the East Rand …… 2:06, especially with oil flows. So we’re probably going to see higher food inflation for a longer period of time. We have seen poultry producers suffer from very high input costs. They price the price increases. We’ll see another soon, I think, from Astral in the first quarter of this year; they’ve already crossed two, three at the end of last year.
So we will end up with relatively high food inflation, high input costs on the consumer side for oil and gasoline. And so it’s going to be a tough, tough year; I think the likes of Shoprite are probably going to do well again, but we’re very nervous in particular …… 2:42 guys, because we saw the numbers come out at high-end discretionary income levels in the last quarter of Last year.
SIMON BROWN: A particular risk is this additional R350. The government pulled it back, brought it back after the July riots, and in next month’s budget it may be extended. if this R350 goes away, as it is currently, it will have a huge impact, especially as you say on that discretion [spend]. I know it’s only R350, but most of it is spent directly at these retailers.
EVAN WALKER: One hundred percent. There is no doubt. They talk about extending this national income [into] perpetuity. It will help. No doubt this will help, but we are still not creating jobs here. In the last two weeks we have seen more layoffs, big layoff plans from big companies at the border. We have seen the unions still in arms and they still face a few sectors. He does not weaken, unfortunately; it is simply not about growing the national economy in terms of jobs. This is the most disturbing sign.
For us, I think the big, big headwind is going to be new power restrictions and potential blackouts that we might see in the third and fourth quarters. That’s our big concern on the national side for this year, and it’s not going to work out well from a consumer perspective.
SIMON BROWN: What about rising interest rates? We had a rate hike last year of just 50 basis points. Markets are probably looking at two or three more over the next year, maybe 18 months. Is it large enough to have an impact as well, or is it small, especially in lower income groups [groups] who maybe doesn’t have prime rate debt?
EVAN WALKER: All filter. We have seen the cuts. Some of the savings from this discretionary level amounted to around R30 billion compared to previous interest rate cuts we have seen coming to the consumer. There is obviously capital savings on that, as well as on your bond repayments. It all adds up. There is no doubt that in a constrained environment this helps considerably at the moment. There are a few hikes there. It will also put a strain on the consumer at the end of the year. So it is a large number. It’s going to be huge on the way up.
We have seen significant credit growth over the past 12 months, but there are areas of the economy or areas where in the banking industry you have seen some growth manifesting itself, [with] the likes of Absa, Standard Bank on the mortgage side between 7% and 9% on these figures. So there is going to be a bit of constriction as the rates go up.
SIMON BROWN: One last quick question. You mentioned Shoprite as a stock you own and it has worked incredibly well, certainly in my portfolio. Are there any that you are particularly looking at on the short side, or is it maybe a little too early?
EVAN WALKER: I think it’s a bit too early for us. It’s a space… ..5: 38. If you look at last year, there were so many system starts and stops. Have you seen …… 5:44 open and close probably five, six times in the last year. I think for us it’s just a matter of trying to see what the standardized basis is in these companies.
On the other side of Shoprite, we think Spar is going to have a rough year. They just don’t match the delivery content of Sixty60 from the Shoprite side of an internet point of view, an online point of view. They [Shoprite] take a massive part in it. We don’t believe Pick n Pay has followed in Shoprite’s footsteps.
And even [there’s] the whole of the Massmart team, given the significant loss that we have seen with the commercial updates; it will be a difficult year for them to resuscitate this company in a difficult environment. So there is obviously an opportunity on the short side. We’re just waiting a bit on that, and potentially in the first or second rate hike, retailers per se are not doing well in this pricing environment.
Banks have outperformed. Our preference would be long banks as a sector, a long bet. A short bet against this would naturally be the retailers.
SIMON BROWN: We will leave it there. Evan Walker, 36ONE Asset Management Portfolio Manager, I always appreciate the time.
