Retail Rally on Truss Could Be Short-Lived as ‘Storm Is Brewing’

British retailers rallied on Tuesday on hopes new Prime Minister Liz Truss could temporarily ease the pressure of rising energy bills, but any recovery could be short-lived as spiraling inflation hits consumers’ wallets. .

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(Bloomberg)—

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British retailers rallied on Tuesday on hopes new Prime Minister Liz Truss could temporarily ease the pressure of rising energy bills, but any recovery could be short-lived as spiraling inflation hits consumers’ wallets. .

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Boohoo Group Plc, the online fashion retailer, and home improvement group Kingfisher Plc led the pack in early trading with shares up more than 8% and 6% respectively. All the major UK retailers, from Marks & Spencer Group Plc and Next Plc to Britain’s two biggest grocers, Tesco Plc and J Sainsbury Plc, jumped on the hope that Truss will announce a series of measures to tackle the cost of living crisis.

“If energy bills are frozen and the rise in National Insurance contributions is reversed, as promised by Liz Truss, shoppers will have a little more money available to spend on little luxuries instead of worrying about heat and food.” Susannah Streeter, senior investment manager and market analyst at Hargreaves Lansdown, said in an email.

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Even with the rally, however, retail remains the worst-performing subgroup in Europe’s benchmark Stoxx 600 index this year, falling 36% so far in 2022 and on track for its biggest annual decline since the global financial crisis.

Although consumer spending has held up so far due to pent-up savings and pent-up demand, analysts at Berenberg say “a storm is brewing.”

“The worst of the ‘cost of living’ crisis is yet to come,” analysts including Graham Renwick wrote in a note to clients. “The macro environment has deteriorated significantly, with geopolitical tensions, supply disruptions and rising energy prices all dealing a severe blow to the global outlook.”

Analysts at Berenberg forecast a drop in UK discretionary spending of up to 25% for low-income households in 2023, noting that this prediction “could be too optimistic if energy prices and interest rates continue to decline.” increasing”. Those with higher incomes are not immune, with analysts estimating a 4% decline in discretionary spending for that demographic.

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Meanwhile, analysts at Jefferies said utility bills and mortgage payments are “two key areas of pain” for UK consumers. They estimate that revenue available for discretionary spending will fall more than 6% in 2023-24 at current energy prices.

READ: Retailers warn of a brewing storm as UK sales growth falters

“We now surrender to the militarization of gas prices in Europe,” analysts including James Grzinic wrote in a note on Tuesday. “The scale of the challenges, despite the upcoming bailouts, is such that we cannot recommend buying any of the seven stocks in this report.”

Analysts at Jefferies downgraded their recommendations on Associated British Foods Plc, Kingfisher, Sainsbury, Tesco and B&M European Value Retail SA, while analysts at Berenberg lowered their ratings on Adidas AG and Hennes & Mauritz AB.

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