Reseach Team, 17 February 2017

This week markets have rallied driven by positive corporate earnings and promises from the US president for an exceptional tax plan. The three main indexes in the US saw the longest streak of record closes since the early 90’s as Donald Trump continued with his tax rhetoric, saying again this week that it will be phenomenal and released in the not too distant future. Since the election US markets have rallied, on the back of the fiscal stimulus measures that Trump campaigned on.

Adding to the positive mood in the markets this week was US Federal Reserve Chair, Janet Yellen’s testimony. Yellen said that investors are expecting growth supportive fiscal policies and a boost to corporate earnings. Both days of her testimony saw hints that the Fed may resume its gradual rate rise at its next meeting in March. The market is now pricing in a 44% chance of a rate hike in March, this is up from 26% at the same time last week and up from 12.4% in mid-January.

The local economic calendar was fairly quiet this week, with investors largely turning to the corporate reporting season for direction. Things ramped up this week with a large number of corporates reporting both half and full year results. Next week, it gets even busier with Thursday the fullest day on our calendar. Expectations were for median earnings per share growth on the NZX50 of 8.2% for FY17, and 7.8% for the ASX50.

A2 Milk has been a stand out for the reporting season in New Zealand so far, with the company more than tripling its first half net profit from the previous year. Earnings were driven a huge increase in demand for its infant formula in China. The company saw revenue increase in all regions, although not as strongly as the demand growth in China. Chief Executive Geoff Babidge said the results show progress towards the goal of building a global brand. The company expects infant formula sales to be materially higher than they were a year ago, although it expects sales will be lower than they were in the first half. The company reiterated that it expects to adopt a dividend policy at the end of the current fiscal year should current trends continue. There was a strong reaction in terms of share price initially, rising 9% on the opening bell, however, these gains were pared back later in the day.

In Australia, biotherapeutics company CSL Limited delivered a very strong first half result with solid performances from all of its products and offerings. CSL’s core immunoglobulin business grew sales by 22% during the period as competitors faced supply issues, although management expect this to normalise in the second half of the year. The company reaffirmed the upgraded full year guidance given in January for net profit to grow by 18-20%. The share price reaction was reasonably small initially, however, later in the day, investors warmed to the result and the share price rose 2.85%.

The Real Estate Institute of New Zealand (REINZ) released its January housing statistics which indicated that the rampant house price growth we have seen over the past year may have slowed. The national median house price came in at $490,000 and although this represented a 9.4% increase from January 2016, it also showed a 5.0% slowdown from the December price. There was a reduction in the number of properties for sale for the month while the number of days to sell a property increased from December. However, it is important to note that traditionally January is a quiet month for real estate and the report included an anecdotal note which suggests that the market began to pick up speed towards the end of the month.

Next week, reporting season ramps up even further, with the busiest day of the February reporting season coming on Thursday. We will be watching for results from Chorus, EBOS Group, Air New Zealand, Meridian Energy and Port of Tauranga on the local front. The US Federal Reserve meeting minutes will be released which will give further colour to Yellen’s testimony this week on when we should be expecting the next rate rise from the Fed.