Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Could the party in e-commerce stocks stop on real inflation?
Peter Garnry
Chief Investment Strategist
Summary: E-commerce stocks are up 67% this year in USD terms and are showing no sign of ending their momentum. But rising global container rates hitting levels 84% above the long-term average since 2011 and bottlenecks in last-mile delivery are pushing up logistics costs for e-commerce businesses. Q3 earnings releases from JD.com and Zalando are confirming these observations with EBITDA margins under pressure. Could this be a negative surprise in the making in Q4 that investors are completely overlooking?
Economic inflation indices and market-based indices do not suggest inflation is here, but FedEx and UPS have difficulties getting enough vans for last-mile deliveries of e-commerce packages which have exploded in volume due to Covid-19. At the same time 40-foot container rates are up 112% since the lows this year hitting the highest levels since mid-2011 and 84% above the average container rate since 2011. This is real inflation on the ground and several commodity markets are also flashing elevated prices, copper is one of them, but have also moved into backwardation suggesting that commodities could begin to surge even more.
Some estimates put the free shipping & returns, and warehousing at around 10% of total retail price but this figure obviously varies across categories, countries, and price levels. If we assume free shipping and returns are around 7% of revenue, then a doubling of those costs could significantly impact the operating profitability of e-commerce businesses. JD.com has recently experienced a small dip in its EBITDA margin in Q3 and basically it is flat from Q1 despite significantly higher revenue. Zalando in Europe experienced a drop in its EBITDA margin to 8.5% in Q3 from 12.3% in Q2. Analysts are currently expecting Zalando’s EBITDA margin to increase in Q4 but is that realistic given the FedEx and UPS story combined with the surge in Q4 in global shipping rates? If commodity prices also rise, then the entire global supply chain will begin feeling the input cost pressure. One thing is for sure, Saxo’s theme basket of global e-commerce stocks, which we wrote about recently, is not showing any signs of discounting profit impact from higher logistics and commodity prices. Our e-commerce theme index is up 67% in USD this year. It could be a good idea to scale down positions in e-commerce in anticipation of negative surprises in the Q4 earnings season starting in late January.
Could more stimulus create a policy mistake and more inflation?
If investors only looked at financial markets, they would not think inflation was knocking on the door. But look outside in the real world and small pieces are slowly forming a richer picture suggesting inflation could be coming. The Covid-19 pandemic has created historically high social transfers through fiscal deficits propping up demand while creating large excess savings among households. While leading indicators and Covid-19 vaccines suggest normalisation in 2021, the lagging indicators show labour market destruction and companies under severe pressure. The lagging indicators are often the ones politicians react to and this is also why policy makers around the world might make the biggest policy mistake in newer history unleashing even more economic support. Through its lagging effect it will begin working just as evidence suggest the economy is heating up accelerating the demand pressure and creating a positive feedback loop on prices that might not be easy to stop again. In 2021, inflation is one of the key things to watch.
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