Container shortages and ecommerce returns are the latest wave of challenges for retailers trying to survive COVID-19 and recent lockdowns. For many retailers, both factors are cutting into any margin of profit they hope to make. Retailers’ core focus for 2021 is expected to be on finding a way to curtail the high volume of returns. Meanwhile, the USD’s gains were reversed by market volatility and the loonie is being curbed by the slow vaccine rollout. In equity markets, Scotiabank analysts don’t see a similarity to the dotcom bubble in current pockets of exuberance.
Scotiabank analysts weigh in on what the pandemic means for retailers, equities and currency rates.
Retail
- New challenges in 2021. After navigating innumerable headwinds throughout 2020 and the COVID-19 pandemic, retailers — particularly apparel players and those who source goods abroad — started 2021 facing new challenges. A critical shortage of containers is driving up shipping costs and delaying the arrival of goods purchased from China. Some retailers worry that by the time goods arrive the seasonal selling period may have ended, necessitating markdowns. For many, this could seriously exacerbate a surplus inventory situation brought on by slower-than-expected holiday sales. Companies are waiting weeks for containers and paying premium rates. In December, spot freight prices rose 145% year-over-year on the Asia to US West Coast route. The shortage has Chinese companies aggressively trying to get empty containers back, which is negatively impacting North American exports. CNBC recently reported that three out of four containers are going back to Asia empty. As well, the curtailment of international flights leaves limited alternatives for transporting goods. The crisis is having a pronounced impact on ecommerce retailers of consumer goods, which are primarily manufactured in China.
- Returns also are becoming a challenge for retailers that are increasingly relying on ecommerce to deliver goods to consumers. Returns add significantly to costs and, in many cases, can wipe out any margin achieved with the sale. The situation has become so challenging that many retailers, including Amazon and Walmart, are telling customers to keep unwanted items. Lending urgency to finding a way to lower returns is that the share of returns for online purchases is in the range of 30%, considerably higher than that of physical stores. In the apparel sector consumers are exploiting free shipping and easy return policies to make multiple orders and then return what they don’t want. Retailers are focused on trying to replicate the in-store shopping experience as best they can with newly developed technologies such as virtual dressing rooms. We believe this will be a core focus for retailers in 2021.
- On a lighter note, Montreal-based global convenience-store operator Alimentation Couche-Tard stole headlines on Super Bowl weekend as its marketing and communications team responded swiftly to a Super Bowl ad. Leading up to the event, General Motors launched an electric vehicle (EV) campaign in which comedian Will Ferrell attacked Norway for being ahead in EV penetration. Circle K responded with its own campaign “We’re ready” featuring its employees and Norwegian actress Silje Torp Faervaag, known for her role in that country’s hit television comedy Norsemen. The ad highlighted that Circle K is ready for the future now because it is the leading location for EV charging in Norway.
— Patricia Baker, Director, Retailing, Global Equity Research
Currencies
- The U.S. dollar’s gains in 2021 reversed this week as market volatility eased from its late-January/early-February highs amid heightened retail equity trading activity. Canadian and US stock markets reached record highs due to continuing optimism over the post-lockdown recovery globally, and as the US quickly rolls out vaccines. The USD’s gains were also curbed by a slight decline in long-term US yields as markets reconsider their expectations of a possibly earlier “tapering” of the Fed’s asset purchases and as stimulus negotiations in Congress drag on.
- The Canadian dollar (CAD) saw little benefit from rising oil prices. Commodity prices continued their climb this week on solid demand prospects, with copper touching its highest level since early 2013 and crude oil trading near its pre-pandemic mark. However, Canada’s vaccination pace is limiting bullish sentiment in the CAD, which posted one of the smallest gains among G10 currencies this week. The Canadian economy also lost 213,000 jobs in January, as reported last Friday, with provincial lockdowns harshly limiting activity in customer-facing sectors.
- The pound (GBP) was one of the week’s top performers thanks to the UK’s leading rate of inoculations, with roughly a fifth of Britons having received at least a first dose of the vaccine — compared to about 10% in the US and a little more than 2% in Canada. The GBP had struggled to rise past the mid 1.37s area in prior weeks but succeeded in pushing above it this week. Investors have trimmed negative BoE rate bets as the bank highlights their negative effects and with the UK economy aiming for a strong post-lockdown rebound. We think the GBP may continue its climb for a test of the 1.40 mark in the coming months.
- The week ahead will be quiet on the data and events front, with reduced trading activity in Asia around the Chinese New Year — markets in China are closed until Thursday. Price action in FX markets will likely follow the risk mood set by US stimulus discussions and vaccine developments globally. The main on-calendar risk will be Wednesday’s US January retail sales print that is expected to show a rebound in consumption after a weak Q4.
— Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist
Equities
- Retail speculation is a red herring, focus on fundamentals. The recent buying frenzy by retail investors has received a lot of airtime recently. Some investors are quick to compare the current episode to the dotcom bubble and its well-known end. While we see some pockets of excessive exuberance in equity land, broadly speaking, we do not believe 2021 is all that similar to 1999-2000 for a few reasons — valuations, monetary policy, and breadth.
Key factors that should continue to lift stocks remain unchanged, in our opinion:
- COVID cases abating, vaccination accelerating
- Earnings trajectory remains up
- Fiscal and monetary support remains supportive
- Liquidity is abundant and cheap
- Our asset allocation model continues to be overweight equities on the back of strong/recovering macro, fundamentals, and technicals data. We continue to believe cyclical-value sectors are well positioned to outperform (although the road forward could be bumpy on a monthly basis, as experienced in January).
- Sector positioning: Our preference remains toward cyclical-value sectors. We maintain overweight exposures in industrials, discretionary, financials, and resource sectors. We have trimmed our precious metals exposure further as strong risk-on appetite and a technical bounce in the USD could continue to weigh on the space in the short run. Moreover, bullion is now trading below sell-side consensus forecasts. We are adding to our overweight energy. With WTI now hovering well above sell-side consensus for all four quarters of 2021, positive EPS/CFPS revisions should extend in coming months.
— Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research
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