In Brief: US Autoworkers; Supermarkets; The Economy; And Gold Miners

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US autoworkers threaten to strike; why there’s value in supermarkets; Australia economic slowdown; China’s tepid stimulus; upside in gold.

-The economic impact of a US autoworkers strike
-The outlook for Australian Food & Liquor
-Australia’s growth outlook and what’s needed from China
-M&A the next big thing among gold miners

By Greg Peel

Working for the Man

There are four distinct risks causing angst on Wall Street at present: Rising oil prices, rising bond yields, another Congressional circus ahead of an end-September budget deadline, when the US government will run out of money (again), and a threatened strike by US autoworkers.

US autoworkers for the Big Three of General Motors, Ford and Stellantis (Chrysler) have threatened to go on strike if they don’t get a 40% pay rise over four years, improved retirement benefits, and a shorter standard work week.

If 146,000 workers go on strike, US jobs growth may well turn negative, and a -30% decline in auto production would result. This would knock -0.2-0.3% off US GDP, Oxford Economics calculates, over the duration of the strike. And it would thus impact on September industrial production and October non-farm payrolls.

The dispute come on the heels of a new contract won recently by workers at United Parcel Service of America Inc (UPS), who are represented by the Teamsters (truckers) union. It’s beginning to look a lot like 1970s Australia.

Unions are gaining more traction, but with only a small fraction of workers members of unions, Oxford thinks the impact of organised labour on wages and inflation will remain limited for now.

Assuming the strike ended within 4-6 weeks, there would probably be enough time for output to rebound before the end of the quarter, meaning the impact on December quarter GDP would be negligible. A more lasting risk is a prolonged strike that would disrupt the recovery in auto supply chains, lending an upside risk to the economists’ inflation forecast.

There is still time for negotiation with the auto companies but as they are acting individually, there could be a strike at one or two of the Big Three.

Clean-Up Aisle Three

Australia’s Food & Liquor sector, these days coming under the label of FMCG (fast-moving consumer goods) sector, has underperformed the ASX100 some -9% over the past six months, despite what Jarden considers one of the most favorable trading backdrops in over 15 years which, in prior cycles, led to over 8% relative sector outperformance.

Why? Sales are strong, noted Jarden, the market is rational and balance sheets are sound.

Coles Group ((COL)) did suffer from weaker FY23 margins due to higher operating costs, but Woolworths Group ((WOW)) managed to increase margins. Shoppers are “trading down” to cheaper products due to the cost of living, but volumes remain sound. Endeavour Group ((EDV)) did see lower retail sales while managing to maintain margins.

Coles also suffered from an increase in shoplifting, while Woolies did not.

In Jarden’s view, the sector outlook is positive, with value emerging in the underperformers, being the aforementioned three. The broker believes upside risk exists for Coles, Woolies and Metcash ((MTS)) sales in FY24, and Coles earnings should reaccelerate into FY25-26, providing scope to re-rate.

Metcash is undervalued based on improving share trends in grocery and the recent sector re-rating of Bunnings ((WES)). Endeavour should continue to face near-term revenue headwinds (liquor subdued) but has significant optionality via cost, growth projects and property, Jarden believes.

The broker’s preferences are unchanged, in descending order of Woolies, Metcash, Endeavour, Coles, albeit as we move through FY24, Coles should move up, the broker suggests.

Brokers in general believe supermarkets and liquor outlets should benefit from a shift back to at-home cooking due to the cost of living, following a rush to return to restaurants post-lockdowns in the last couple of years. Endeavour is a bet each way given what it loses in pubs and restaurants it picks up in bottle shop sales.

But there are doubters among them who believe cost-side risks imply valuations are indeed too high.

Economic Outlook

The peak in the interest rate tightening cycle now looks to be in, note Westpac’s economists, with policy firmly on hold in Australia and the US and peaks imminent elsewhere. That should usher in a period of relative calm policy-wise, albeit with the full impact of tightening still flowing through to the real economy.

For markets, attention is turning to the timing of and extent of prospective easing. This will naturally depend on, firstly, inflation developments, and beyond that, the growth profiles and degree of slack that emerges, Westpac suggests.

Around inflation, progress has again been good, headline rates tracking towards targets in most economies. The news on growth has also been a little more positive than expected, especially in the US where the risk of recession now looks to be remote.

A sharp slowdown of the Australian economy is underway, Westpac notes, as confirmed by the June quarter GDP, which showed consumer spending broadly flat in the period and overall economy growth subdued. GDP growth is forecast to slow from 2.7% for 2022 to a well below-trend 1.2% in 2023.

Household real disposable income contracted for a fifth consecutive quarter, despite current robust labour market conditions, squeezed by the cost of living. Conditions are likely to remain weak during the first half of 2024, Westpac suggests, as the labour market ultimately cools and unemployment rises. Then in the second half of 2024, the economy is forecast to strengthen to around a 2% annualised growth pace, supported by an emerging easing of both monetary and fiscal policy. On balance, Westpac expects GDP growth of 1.6% for 2024.

A lot of course depends on China, where headlines have been very negative on declining exports and property troubles, sparking fears of a hit to resources demand. The uncertainty impacted base metal prices in the June quarter but iron ore and coal were unscathed, Westpac notes, posting solid gains, and crude oil and LNG were slightly firmer on tight supply.

Chinese authorities must take an active role in the economy to buoy confidence and guarantee the proper functioning of the financial and public sectors, says Westpac. If authorities do not take action in coming months, their long-term growth ambitions will likely slip out of reach.

The PBoC cut its one-year rate by -15 basis points last month, taking cuts year to date to only -25 points. The quantitative tools the PBoC relied on to pump up credit growth in past downturns have become ineffective due to weak demand, Capital Economics suggests. That leaves interest rates as the main avenue for monetary support.

But bank lending rates have to decline to a much larger extent, Capital Economics believes, by a further -100 points or more, to have a meaningful impact. The main barrier to doing so is the central bank’s focus on exchange rate stability.

All that Glitters

As the gold sector heads to the annual Denver Gold Forum again, UBS reflects on the last twelve months. Last year the Forum marked a cyclical bottom for the gold mining sector, the broker notes, with depressed share prices and investor sentiment so low that some gold majors were promoting themselves as copper companies.

Since then, USD gold is up over 11% and AUD gold over 20% and most stocks have outperformed materially, UBS points out, despite many doing their best to downgrade expectations on production and costs.

From here the broker expects gold to move higher and sees selective value in the sector, but with the “cat out of the bag” on the quality of some portfolios, UBS expects M&A to be a feature of the next phase.

On the ASX, that means UBS has a preference for Newcrest Mining ((NCM)), which will be swallowed up by Newmont, over Evolution Mining ((EVN)) and Northern Star Resources ((NST)) among the large caps, and Gold Road Resources ((GOR)), De Grey Mining ((DEG)) and SSR Mining ((SSR)) among smaller miners.

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