SIMON BROWN: I’m chatting now with Evan Walker, portfolio manager at 36ONE Asset Management. Evan, I appreciate the time again. We chatted a couple of times last year; I think the last time was around midyear. If my memory serves, it was ahead of the riots in KZN in July.
You’d been bearish on local retail, but the caveat was the grants from government, the R350. They came back, so some parts of retail actually did fairly well – Shoprite, Dis-Chem, Lewis. Others – Pick n Pay, Spar – not so much. What’s your reading on the sector going into 2022?
EVAN WALKER: Hi. Good morning. I think it’s a very similar stance to us to last year. We are quite cautious. We do own some Shoprite in the portfolio. I think we are looking for stocks where there is still potential market share gains from a competitive base. But I think it’s going to be a reasonably average year.
We can see the consumers are under [pressure] and, as we discussed last year, there’s still, as we discussed last year, a huge amount of stimulus in the base. Going all the way back to 2020 now, we saw huge amounts of number one, government stimulus, and a lot of retrenchment money unfortunately getting paid out, which continued last year. So there’s a huge amount of once-off pay … which we are beginning to see now come to an end. We’ve seen it in a lot of the discretionary-type money, such as the Cashbuild trading updates, the numbers coming out of Massbuild etc in some of the stables now, where discretionary-like money has been hit hard. We still think it’ll be an average year for the non-discretionary money at the retailers, the food retailers, and so on. We’ve seen slightly higher food inflation creep through the system now.
We’ve just been discussing with Wayne [McCurrie] global inflation with similar dynamics in the Eastern environment, specifically with the flow-through from oil. So we are likely to see higher food inflation for longer. We’ve seen the poultry guys suffering with very high input costs. They are passing [through] price increases. We’ll see another one quite shortly, I think, from the likes of Astral into the first quarter of this year; they’ve already passed through two, three in the late part of last year.
So we’re going to be sitting with relatively high food inflation, high input costs from the consumer side on oil and petrol. And so it’s going to be a tough, tough year.
I think the likes of potentially Shoprite will probably still do well, but we are very nervous [about the discretionary] guys, because we’ve seen the numbers coming out at the high-end discretionary income levels into the last quarter of last year.
SIMON BROWN: A particular risk is that extra R350. The government withdrew it, brought it back after the July riots, and in the budget next month maybe [it’ll get] extended. If that R350 disappears, as is currently the plan, that’s going to have a massive impact, particularly, as you say, on that discretionary [spend]. I know it’s only R350, but most of it is being spent directly into these retailers.
EVAN WALKER: One hundred percent. There’s no doubt. They are talking of extending this national income grant [into] perpetuity. It will help. There’s no doubt it will help, but we’re just still not creating jobs here. In the last couple of weeks we’ve seen further retrenchments, big proposed retrenchments from big companies around the border. We’ve seen the unions still up in arms and they are still up against a couple of sectors. It’s not abating, unfortunately; it’s just not growing the domestic economy from a jobs perspective. That’s the most worrying sign.
For us I think the big, big headwind is going to be further electricity constrictions coming out and potential rolling blackouts that we could see into the third and fourth quarter.
That’s our big worry on the domestic side for this year and that’s not going to do well from a consumer perspective.
SIMON BROWN: What about rising interest rates? We had a rate increase last year, just 50 basis points. Markets are probably looking at another two or three over the next year, maybe 18 months. Is that significant enough to also have impact, or is that modest, particularly in lower income [groups] who perhaps don’t have prime-linked debt?
EVAN WALKER: It all filters through. We saw the reductions. The savings from that discretionary level were roughly R30 billion from the previous interest-rate reductions that we saw come to the consumer. There’s obviously some capital savings on that, as well as on your bond repayments. It all adds up. There’s no doubt that in a constrained environment it’s helping significantly at the moment. There are a couple of upticks there. It’s also going to put strain on the consumer come the latter part of the year. So that’s a big number. It’s going to be a big number on the way up.
We have seen significant growth in credit over the last 12 months, but there are sectors of the economy or sectors where in banking you’ve seen some growth coming through, [with] the likes of Absa, Standard Bank on the mortgage side up between 7% and 9% on those numbers. So there’s going to be a little bit of constriction coming as rates rise.
SIMON BROWN: A quick last question. You mentioned Shoprite as a stock that you hold and it has done incredibly well, certainly in my portfolio. Are there any that you’re particularly looking at on the short side, or is it perhaps a little too early?
EVAN WALKER: I think it’s a little too early for us. It’s a messy base. If you look back at last year, there were so many starts and stops to the system. You saw liquor opening and closing probably five, six times during the course of last year. I think for us it’s a question of just trying to see what the normalised base is in these businesses.
On the other side of Shoprite we do think Spar’s going to have a tough year. They’re just not matching up to the delivery content of Sixty60 on the Shoprite side from an internet perspective, an online perspective. [Shoprite] are taking massive share there. We don’t think Pick n Pay has followed in the footsteps of Shoprite.
And again [there’s] the whole Massmart stable, given the significant losses that we saw coming out with the trading updates; it’s going to be a tough year for them to resurrect that business into a hard environment. So there’s obviously opportunity on the short side. We are just waiting a little bit on that, and potentially into the first or second rate increases retailers per se don’t do well into that rate environment.
The banks outperformed generally.
So our preference would be to the long banks as a sector, a long bet. A short bet against that would naturally be the retailers against that.
SIMON BROWN: We’ll leave it there. Evan Walker, portfolio manager 36ONE Asset Management, I always appreciate the time.