The current scenario of interest and inflation poses a challenge to retail, leading to losses in the stock market

The current macroeconomic scenario, with high interest rates and accumulated inflation above 10% in 12 months, has imposed challenges on Brazilian retail. Shares of companies in the sector have led losses on the stock market this year, with the B3 consumption index (ICON), which measures the performance of major stocks in the consumer and healthcare sectors, down 12.45 percent through August – compared to an accumulated increase of 4.48 % Ibovespa.

“There are many factors that influence this poor performance. The first are the most obvious: the high Selić rate, which is 13.75% today, discourages consumption, and thus sales. This movement is accompanied by an increase in prices, which makes inputs and products more expensive for the retailer who, in turn, has less room to pass this increase on to the consumer,” explains Eduardo Luque, managing partner of the IRKO Group.

In addition, according to him, high interest rates reduce the amount of credit with consumers, which could encourage purchases and increase irregularity among customers. They also hinder companies from raising funds, in a sector that has high working capital needs.

Today, the average interest rate for personal loans is 4.1% per month – it was 3.4% a year ago – and the revolving credit card rate, 14.16% per month – was 12.3% in 2021 – according to the July Anefac survey (National Association of Finance, Administration and Accounting Managers). The same report said that for businesses, interest on working capital loans rose from 1.26% to 1.92% per month over the period, while the overdraft rate rose from 6.95% to 7.88% per month.

“At the same time, we see two other factors affecting the business of retailers. The first is the growth of large foreign markets, which oppose domestic companies. Second, the continuation of face-to-face activities, which also increases competition for e-commerce, as physical stores are again an option,” says Luque.

According to him, both movements may lead to companies having to further reduce their margins as a way to attract consumers.

How to survive in this scenario?

Although the short-term horizon is full of challenges, the IRKO Group partner reminds us that there are opportunities for change. “If there is an improvement in the inflation outlook for 2023, with the yield curve inverting, investors should return to considering retail companies as a good option – especially given the current low share price,” he says.

Focus central bank research predicts that the Selic rate should end this year at the current 13.75%, and by the end of 2023 at 11% annually. The projected inflation for 2022 is 6.70% – for 2023, the projection is 5.30%.

Traders should also benefit from the expected injection of funds with the Auxílio Brasil payout of R$600, which started this month. The increase in benefits, added to aid to be paid to truck drivers and taxi drivers, is estimated to inject R$16.3 billion into commerce, according to the CNC (National Confederation of Commerce). “This stimulus can help the sector now, but its effects on inflation and the yield curve in the long run need to be understood,” says Luque.

Betting on strengthening your markets, developing solutions for partners, such as new technologies in the financial segment, can also generate revenue growth in the future. “Today, some brands offer credit lines, means of payment and logistics with lower prices to help seller partners, and this is reflected in the benefits for the customer, increasing sales,” says the expert.

Finally, the return of social interaction can boost the consumption of items such as clothing and footwear, beauty products and drinks (for restaurants and bars) and thus sustain the growth of some companies in the sector.

“There are many factors that can affect retail performance in the coming months. Overall, we should continue to see a cautious scenario from companies and investors – at least until the end of 2022,” he says.

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