Finimize - 💔 Investors dumped property

What’s going on here?

UK grocery giant Tesco raised its profit forecast on Wednesday after an absolutely smashing start to the year, as the Brits would say.

What does this mean?

Tesco’s sales over the first half of the year were up nearly 8% from the same time last year, excluding the effects of opening and closing stores. Tesco maintains that’s a result of keeping prices as close as possible to discount rivals like Aldi, persuading budget-conscious shoppers to walk through the doors. Thing is, the retailer sold roughly the same amount of items as it did last year, meaning those sizable sales – and the resulting better-than-expected profit – were down to higher, not lower, overall prices. Either way, predicting that easing inflation will encourage shoppers to pile their carts extra high during the holidays, Tesco pulled up its profit forecasts for the rest of the year.

Why should I care?

Zooming in: Rock, meet hard place.

Inflation’s making small decisions – like where you shop – matter more than usual. And while discount retailers like Aldi and Lidl may seem like a clear choice, the difference could be smaller than you think. See, cheaper own-brand products have the thinnest profit margins, so when inflation sends costs upward, retailers have to hike their price tags to make sure they break even. That means while your premium grocery bill will have gone up, for sure, the percentage increase could well be less than that of a traditionally budget-friendly alternative.

For markets: We’re all just pawns.

Major supermarket chains have an advantage over many other types of retailers: their customers truly need what they’re selling. So they can pass higher costs onto their shoppers, who will duly trim from other areas of their budget to keep food on the table. And while retailers are quick to pull prices up, they’re not as fast to drop them when costs eventually cool down. For the likes of Tesco, Walmart, and Costco, that’s a recipe for premium profit margins.

What’s going on here?

Investors have ditched Europe’s commercial property market, a breakup that could keep the sector in the dumps for a while.

What does this mean?

Europe’s commercial property market has been put through the wringer, with high interest rates weighing on the sector’s valuations. Naturally, then, investors have been ditching related funds and putting their cash into assets that are benefiting from rising rates instead. Case in point: investments in European commercial real estate were down 59% in the first half of this year versus the same period last year. That’s a problem: the lack of interest may force funds to sell off the property investments they own, which could force prices in the property market – already posting double-digit dips – down even further.

Why should I care?

For markets: It’s a hard-knock life.

It’s no wonder European property funds are trading for far less than they’re worth. Existing investors are jumping ship in case property prices drop again, and new rules in France and Germany that force traders to hold cash in funds for a set period of time are putting off any new would-be investors. And to make matters worse, the same rising rates that are depressing property prices are also making it more expensive to pay back debt – something property funds have buckets of.

The bigger picture: A long game of limbo.

The worry about interest rates isn’t necessarily how high they go, but how long they stay there. If rates stay high for a long time, a whole bunch of investments will end up winded. Stocks included, as high rates bring down company valuations and the value of their future earnings. So here’s the twist: European property could actually be a safer bet since its low demand and high risk has likely already been accounted for in investments’ prices, taking some of the guesswork out of the equation.