The least surprising thing about last week’s vote for the UK to leave the European Union was the impact that it had on retailers’ shares.
While the referendum result may have come as a shock to many, the subsequent effect it had on stocks was entirely predictable.
Understandably, investors are spooked. In fact, spooked doesn’t really come close, going by the slumps in share prices recorded first thing last Friday.
The All-Share Index tumbled 8% in the morning, but recovered to be down 3.8% by the end of the day.
Food retail stocks performed less well against that, closing at down 4.6% on Friday as investors feared falling consumer demand and rising inflation due to sterling’s fall.
However, the food sector was up by 2.9% as a whole last week and there are more reasons to be cheerful, according to Stifel analysts.
Stifel believes that grocers will perform better than non-food retailers in the face of a potential economic downturn.
The broker says the most important implications for the food sector of Brexit are the potential for cost price inflation given high levels of imported goods, a potential slowdown in population growth and the impact of uncertainty on UK consumer spending.
“Sports Direct was one of the biggest fallers after it issued a warning to the stock market that the plummet in the value of sterling means it will face higher buying costs”
Of the three, inflation is the most significant, says Stifel. Yet it is not overly concerned. Not only will competitive pressures help keep prices keen, but consumers have not in the past fully traded down in the face of rising prices, “meaning the industry is likely to return to much-needed top-line growth”.
The outlook for the general retail sector is more gloomy. As independent analyst Nick Bubb says, the sector may have “rallied off its catastrophic early lows” on Friday morning, but still closed down by as much as 10% by the end of the day.
Sports Direct was one of the biggest fallers after it issued a warning to the stock market that the plummet in the value of sterling means it will face higher buying costs.
Where there is panic for some, there lies opportunity for others, however. There are forecasts that the fall in share prices could trigger more takeovers from overseas buyers.
It’s not a given though. Steinhoff is “considering its position” on its plan to take over Poundland, citing “the impact of the EU referendum on global markets”.
While there is short-term risk in acquiring a business that finds it harder to manage margin pressures than most, it may spy long-term opportunity to buy into a thriving sector at a good price.
The next few months will be rocky when it comes to consumer confidence and the wider economy following Brexit, but things may about to get very exciting in the world of M&A.