London September 7 2022: The cost-of-living crisis facing consumers has “only just begun,” according to analysts at JPMorgan Chase & Co., who downgraded clothing company Hennes & Mauritz AB and flagged risks for other retailers including Marks & Spencer Group Plc.
Consumer spending on discretionary items in the UK may shrink by a mid-single-digit percentage in 2023 compared to 2019, even if the UK energy price cap is frozen at the current level, retail analysts including Georgina Johanan wrote in a note. Spending may fall 10% without an energy price freeze, they said.
While yet-to-be announced government support measures from new UK Prime Minister Liz Truss “could be meaningful, JPM economists are mindful this brings a risk of faster rate hikes, simply delaying rather than removing recessionary risk,” the analysts wrote. “Winter is (still) coming” for UK consumers, they said.
At the same time, retailers face increasing pressure from rising energy and staffing costs, as well as headwinds from the stronger dollar and — for clothing companies — higher cotton prices, the analysts said.
JPMorgan cut H&M to underweight from neutral and put clothing and food retailer M&S on a so-called negative catalyst watch, along with Primark owner Associated British Foods Plc and home furnishings retailer Dunelm Group Plc. Shares in H&M fell as much as 2.8% on Wednesday.
“With earnings momentum set to remain a greater driver of near-term sector performance than potential longer term valuation, we remain cautious across our entire coverage with few exceptions,” the analysts wrote.
Retail has been the worst-performing sector in Europe this year, down 38%. In the UK, the FTSE 350 Retailers Index has slumped 33%.
