Could the party in e-commerce stocks stop on real inflation?

Equities 6 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  E-commerce stocks are up 67% this year in USD terms and are showing no sign of ending their momentum. But rising global container rates hitting levels 84% above the long-term average since 2011 and bottlenecks in last-mile delivery are pushing up logistics costs for e-commerce businesses. Q3 earnings releases from JD.com and Zalando are confirming these observations with EBITDA margins under pressure. Could this be a negative surprise in the making in Q4 that investors are completely overlooking?


Economic inflation indices and market-based indices do not suggest inflation is here, but FedEx and UPS have difficulties getting enough vans for last-mile deliveries of e-commerce packages which have exploded in volume due to Covid-19. At the same time 40-foot container rates are up 112% since the lows this year hitting the highest levels since mid-2011 and 84% above the average container rate since 2011. This is real inflation on the ground and several commodity markets are also flashing elevated prices, copper is one of them, but have also moved into backwardation suggesting that commodities could begin to surge even more.

Source: Bloomberg

Some estimates put the free shipping & returns, and warehousing at around 10% of total retail price but this figure obviously varies across categories, countries, and price levels. If we assume free shipping and returns are around 7% of revenue, then a doubling of those costs could significantly impact the operating profitability of e-commerce businesses. JD.com has recently experienced a small dip in its EBITDA margin in Q3 and basically it is flat from Q1 despite significantly higher revenue. Zalando in Europe experienced a drop in its EBITDA margin to 8.5% in Q3 from 12.3% in Q2. Analysts are currently expecting Zalando’s EBITDA margin to increase in Q4 but is that realistic given the FedEx and UPS story combined with the surge in Q4 in global shipping rates? If commodity prices also rise, then the entire global supply chain will begin feeling the input cost pressure. One thing is for sure, Saxo’s theme basket of global e-commerce stocks, which we wrote about recently, is not showing any signs of discounting profit impact from higher logistics and commodity prices. Our e-commerce theme index is up 67% in USD this year. It could be a good idea to scale down positions in e-commerce in anticipation of negative surprises in the Q4 earnings season starting in late January.

Source: Bloomberg

Could more stimulus create a policy mistake and more inflation?

If investors only looked at financial markets, they would not think inflation was knocking on the door. But look outside in the real world and small pieces are slowly forming a richer picture suggesting inflation could be coming. The Covid-19 pandemic has created historically high social transfers through fiscal deficits propping up demand while creating large excess savings among households. While leading indicators and Covid-19 vaccines suggest normalisation in 2021, the lagging indicators show labour market destruction and companies under severe pressure. The lagging indicators are often the ones politicians react to and this is also why policy makers around the world might make the biggest policy mistake in newer history unleashing even more economic support. Through its lagging effect it will begin working just as evidence suggest the economy is heating up accelerating the demand pressure and creating a positive feedback loop on prices that might not be easy to stop again. In 2021, inflation is one of the key things to watch.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.