Weekly economic briefing: Global Powers of Retailing 2018

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Global Powers of Retailing 2018

Deloitte’s Global Powers of Retailing report (released today) identifies the 250 largest retailers around the world based on publicly available data for the year ended June 2017, and looks at their performance across geographies and product sectors.

According to the report, the global retail market is growing, but not strongly. For the year ended June 2017, the top 250 global retailers earned US$4.4 trillion in revenue. This represents a year-on-year increase of 4.1%, a little lower than last year’s result of 5.2%. Of this revenue, around 16% was earned by the top three retailers (all US, not surprisingly – Walmart, Costco and The Kroger Co). Some 90% of leading retailers that disclosed their bottom line results were operating profitably, with the overall net profit margin amongst these a slim 3.2%.

Asia Pacific retailers are accounting for more revenue within the top 250 list. Over the last ten years, their collective revenues have grown from 10.4% to 15.4%. This is partly because more have entered the top 250 (there were five new entrants last year alone) and because Asia Pacific retailers within the top 250 are growing their revenues more quickly than other regions.

Much of the demand for Asian retailers is happening within their countries of origin. The rapid growth of Asian economies over the last decade has allowed Asian businesses to take advantage of growing local demand for retail products. Asia Pacific retailers are more likely than any other region to grow their sales within their home country, rather than by expanding their presences internationally. The average proportion of revenue from foreign operations is 22.5% across all top 250 retailers, but is only 9.4% across the Asia Pacific retailers that made the top 250 list.

Of the top 250 retailers, three originate from Australia. Wesfarmers and Woolworths are by far the largest retailers in Australia, and have been mainstays of the list for many years – ranking 21 and 23 respectively in the world. JB Hi-Fi is the new local entrant, jumping in at 218. Australia’s top three retailers represent 2.1% of total revenue for the top 250 global retailers.

Apart from the three Australian businesses that made the list, 35 of the top 250 global retailers are currently operating in Australia. Of these, 17 are from the US, four from France and three from the UK. US companies represent 45% of the top 250 retailers in Australia by revenue, despite only representing about a third of the top global retailers overall. The charts below summarise the top retailers operating in Australia by country of origin and category.

But the bigger part of the story is that 212 of the world’s top 250 retailers do not have a local presence in Australia (even though many have an online presence). That leaves significant further opportunity for international retailers to enter the Australian market, increasing local competitive pressures.

For more information on the Australian brief, please contact co-authors David Rumbens and Adelaide Timbrell.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Who made money in 2017?

  • Last year was a good one for equity investors, with global equity markets rising by 21%. For a reasonably diversified investor it was hard not to make money.
  • Riskier assets, the ones investors shun in times of uncertainty, did well. In the jargon, markets were in risk-on mode, in search of higher yielding assets.
  • Thus equities easily outperformed the classic ‘safe havens’ of government bonds and gold. US equities, for instance, returned 22% compared to 14% for gold and just 3% for US government bonds.
  • The pattern of riskier assets doing well repeated elsewhere. Emerging market equities outperformed those in developed world. Shares in smaller companies did better than those in larger companies. The return on Greek equities was more than twice that on German equities.
  • The performance of individual countries, sectors and companies tells its own story about the shape of the recovery.
  • A marked reduction in fears about growth in Japan and China pushed equities sharply higher in these two economies. In India, the world’s fastest growing major economy, equities returned 32%.
  • Investors’ enthusiasm for technology stocks showed no signs of abating. The so-called FAANGs soared last year. Facebook, Apple, Amazon and Netflix returned over 50% and Google delivered 33%. The Chinese tech giants, Alibaba and Tencent, doubled in value in 2017.
  • Shares in Caterpillar, the world’s largest construction equipment business, yielded 76%, testifying to a global recovery in the construction sector.
  • In the UK mining stocks returned 30% helped by higher commodity prices. UK-listed Glencore yielded 43%, benefiting from steeply rising prices of cobalt, of which it is a leading producer. Cobalt is the base material for lithium-ion batteries used in electric cars and smartphones.
  • Oil prices rebounded in the second half of last year reflecting stronger global demand and production cuts by OPEC and Russia. In recent days oil hit $70 a barrel, a three-year high. Shares in the major oil companies have headed up in the wake of rising oil prices.
  • House prices rose in most countries last year, but at far slower rates than most national equity markets. In China and the US house prices rose by around 5%. The UK’s Halifax house price index registered a gain of just 1.0% last year.
  • The bull market in equities has been driven by a convincing global recovery, growing levels of optimism and still low interest rates.
  • Supply and demand dynamics have also helped. On the supply side levels of equity issuance through initial public offerings and secondary issuance have been running at relatively low levels. Meanwhile mergers and acquisitions, share buybacks and companies going private have shrunk the existing pool of equity. This process, so-called de-equitisation, has left a growing stock of risk-hungry capital chasing a shrinking volume of assets.
  • Investors generally think that the equity party has further to run. The mood is, with some exceptions, pretty euphoric. In the US equity analysts are more bullish on equities than at any time in almost 40 years.
  • The American Association of Individual Investors reports that private investors in the US have increased their holdings of equities from 66% to 72% of their assets in the last year, the highest level since the dotcom boom in 2000.
  • A Bank of America Merrill Lynch’s survey shows that most institutional investors do not expect equity markets to peak until 2019 or later. In a classic sign of optimism investors are buying into technology and industrial stocks and selling defensive, or lower risk sectors, such as utilities or telecoms. Equities in emerging markets, euro area and Japan are in favour. UK equities are more unpopular with institutional fund managers than at any time since 2001. (A notable exception to this bearishness on the UK is the prominent UK fund manager, Neil Woodford, who believes that Brexit-related risks to UK stocks have been overdone).
  • High levels of investor optimism could be a harbinger of further gains in equities and other risk assets – though history shows it could equally be a harbinger of a sell-off. Bulls emphasise the momentum of the global recovery, still low interest rates and the difficulty of finding better value, income-generating alternatives to equities.
  • Bears worry that the forces behind the bull market may be weakening. Central banks are starting to tighten monetary policy, taking back the cheap money that has powered assets higher. Equities no longer look terribly cheap, and nor do many other risk assets. The vertiginous ascent of Bitcoin, whose price rose fifteen fold last year, has provoked comparisons with famous asset bubbles through history. (Bitcoin peaked at just over $19,434 at the end of last year but last Wednesday briefly dropped below $9,500). The fact that lower grade corporate debt in the euro area yields just 2.5%, less than the 2.6% return on an ultra-safe US government bond, is indicative of how the search for risky assets has affected asset prices.
  • Still, this could run for much longer and a lot of investors expect just that. The challenge for central banks will be to tighten policy without hitting assets markets and the growth which cheap money was designed to boost.

PS: Last week the UK’s Office of National Statistics said that a failure to measure falling prices in telecoms had caused a significant underestimation of productivity gains and output growth in the sector. Revisions to the statistics will transform telecoms, which accounts for 2% of UK GDP, from a productivity laggard to a leader. The episode illustrates the difficulty statisticians face in capturing price and quality changes, often brought about my technological advances. Productivity growth in Western economies may well have been understated as a result of such measurement errors.

PPS: Last May we wrote about research by two US-based economists, Angus Deaton and Anne Case, which charted a shocking decline in life expectancy among less educated, white Americans. At that time I wrote that this was a US phenomenon and that European mortality rates were continuing to decline. This was premature. The latest UK data show that life expectancy in some parts of the UK has fallen by more than a year since 2011. People living in post-industrial and rural areas are dying younger whilst life expectancy is rising in London and parts of the south-east. Possible culprits include rising obesity, smoking and drinking and cuts to social care services. The geographical spread and possible causes are similar to those seen in the US.

 

OUR REVIEW OF LAST WEEK’S NEWS

 

The UK FTSE100 ended the week up 0.4% at 7,731.

UK inflation fell back from a six year high of 3.1% to 3.0%, raising hopes that UK inflation may have peaked for this cycle.

 

International economic briefing by Ian Stewart

Economics and business

  • At the time of setting this briefing for delivery, the US government was in its second day of shutdown as Republicans and Democrats failed to come to an agreement on the federal budget. The senate is scheduled to vote on Monday morning on a bill to fund the government until 8th February.
  • UK retail sales grew at their slowest rate in five years in 2017
  • The Bank of England warned lenders to improve their monitoring of consumer indebtedness
  • A senior figure at the German carmaker, Porsche, said its workers should not be sent work-related emails outside working hours
  • Ford announced plans to significantly increase its planned investments in electric vehicles to $11bn by 2022
  • A report by Oxford Economics predicted that a US exit from the NAFTA trade bloc would reduce US growth by 0.5 percentage points in 2019, fuelling inflation and increasing unemployment
  • ECB board member Benoît Cœuré said euro area countries should take advantage of strong economic growth to carry out reforms and ready themselves for any future financial crisis
  • Bloomberg estimates that hyperinflation in Venezuela has hit an annualised rate of 444,000% – levels now akin to those seen in Germany during the 1920s and Zimbabwe more recently
  • More than quarter of millennials polled in a Blockchain Capital survey said they considered bitcoin investments to be safer than money in the bank
  • The number of Chinese births during 2017 fell for the first time since the country relaxed its one-child policy, reigniting concerns over an ageing population and a future shortage of workers

Brexit and European politics

  • UK MPs approved the flagship ‘Brexit Bill’ which will transfer EU law into UK law
  • A leading Bank of England official said he expects UK wage growth to pick up as Brexit deters foreign workers from entering the UK
  • The cost of rerouting EU supply chains in the event of a ‘no deal’ Brexit scenario could cost the EU as much as £100bn, according to Oxford Economics
  • French President Macron hinted that it might be possible for the UK to obtain a deal with the EU somewhere between a Norway-style agreement and a Canada type free trade deal. The EU’s chief negotiator, Michel Barnier, has previously suggested the UK would have to choose between the two models
  • Deutsche Bank’s chief executive expects to move fewer than 4,000 jobs to Frankfurt following the UK’s departure from the EU
  • Germany’s Social Democrats voted to enter coalition talks with Angela Merkel’s conservative in a move that could end the political stalemate and give Ms Merkel a fourth term in office
  • Packets of McVities Digestives will shrink by 20% due to higher import costs of certain ingredients following the EU referendum vote

 

And finally…

A consultancy firm tasked with finding a solution to alleviate traffic around the iconic Hollywood sign in LA has suggested that the city council builds a second sign on the other side of the hill – Hollywood sequel


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