Growth of Middle Class Spurring Global Grocery Demand

04/18/2013 9:00 am EST


Eoin Treacy

Global Strategist,

But a look at grocery retailers around the world shows that some stocks are much better positioned for further growth than others, reports Eoin Treacy of Fullermoney.

China's voracious appetite for energy and other commodities, and Russia's increasing domestic consumption of the same resources, reflect the evolution of the middle class as per-capita consumption of resources rises.

China's exports of progressively higher value items is in line with our view that as it moves up the value chain in terms of its manufacturing prowess, this will in turn further bolster the health of the consumer class.

The supermarket sector reflects this theme in both countries. Russia- and London-listed Magnit (London: MGNT), is Russia's largest supermarket chain, and with the advent of hypermarkets might be considered Russia's answer to Walmart (WMT). S&P recently upgraded the company's credit rating on its “robust earnings outlook.”

The London-listed share broke out of its two-month range to post a new high, and a sustained move below $40 would be required to begin to question the consistency of the medium-term uptrend.

Hong Kong-listed Wumart (Hong Kong: 1025) has operations in a number of China's Tier One cities. The share hit a medium-term peak in 2010, and has held a progression of lower rally highs since. It found at least short-term support in the region of HK$12.50, and a break above HK$14 would challenge the consistency of the six-week decline.

Australia's Wesfarmers (Australia: WES) has a dominant position in the country's retail sector. It broke successfully above the psychological A$40 area in February. The shares have since pulled back to test that area, but a sustained move below the 200-day MA—currently near A$37—would be required to question medium-term upside potential.

US-listed Walmart is an S&P500 Dividend Aristocrat and is an increasingly globally-oriented company with foreign operations, most notably in the UK, China, and Mexico. The shares completed a 12-year base last year and found support in the region of the 200-day MA in December. A sustained move below the trend mean would be required to question medium-term upside potential.

Kroger (KR) surged out of a four-year base in January and rallied impressively to post a new all-time high. Recently, the shares pulled back sharply, suggesting a process of mean reversion is now underway. If it can hold more than half the recent advance during a process of consolidation, the benefit of the doubt can be given to medium-term potential for a sustained breakout to new highs.

Following explosive growth in the USA, Whole Foods Market (WFM) has embarked on an aggressive international expansion, which is likely to soak up quite a bit of capital over the medium term. The shares lost uptrend consistency from October, and will need to sustain a move above $120 to reassert medium-term demand dominance.

Germany's Metro AG (Germany: MEO) sources approximately 30% of revenue from outside Western Europe. Russia represented its largest market in Eastern Europe, with 7.52% of revenue in 2012. China is its largest in Asia at 2.54%. The shares have a forward P/E of ten and yield 4.46%.

The performance has probably been hampered by the effect of the Eurozone's debt issues on consumer spending, and prices have returned to test the region of the 2009 lows near €20. A sustained move below that level would be required to question base formation development.

In the UK, Tesco (London: TSCO) is an S&P Europe 350 Dividend Aristocrat, and is presently unwinding its short-term overbought condition. A sustained move below 350p would be required to question medium-term upside potential.

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