INSIGHTS

MARKET SUMMARY: 3 TO 7 APRIL

Research Team, 7 April 2017

Cyclone Debbie didn’t bring the only deluge this week, as investors had to process a number of large data points from across the globe. However, investors chose to spend much of the week on the sidelines as a number of political issues raised concerns, particularly in the US. Locally, the quarterly survey of business opinion was released as well results from the latest Global Dairy Trade auction.

The quarterly survey of business opinion showed that headline outlook for the New Zealand economy decreased for the March quarter, with a net of 16% of companies more confident about the next 12 months. This was a drop from a net 26% in December and was the lowest level in a year. However expectations for businesses’ own activity has remained steady with a net 25% of businesses expecting activity to increase. The own activity measure is generally a better indicator for GDP growth and the latest survey is consistent with annual GDP growth of about 3%. Investment intentions in plant and machinery have surged higher, however, plans for new buildings have eased as have hiring intentions, although the numbers are still above historical levels.

The latest Global Dairy Trade auction saw a 1.6% increase in the average price of dairy. This backs up the 1.3% gain seen at the last auction and was again on increased volumes. This second steady gain in a row with larger volumes sold is indicative of the dairy market stabilising, as the index hovers around 1000. Importantly, for NZ farmers, whole milk powder increased 2.4% to $2,924 per tonne, recovering after a dramatic drop at the beginning of March. The Fonterra farmgate milk price remains at $6.00 per kilo of milk solids, and expectations are for it to stay here. This is much higher than the previous two years and will be the first time in three years that the payout will be higher than Dairy NZ’s estimated breakeven amount.

Both Comvita and Orion Health have had dismal weeks in terms of share price performance, with both announcing downgrades to guidance. Comvita issued a full year earnings downgrade as bad weather and a slower than expected recovery in demand from small exporters has impacted the company’s earnings. The company now expects its after tax profit to be around $9 million, much lower than prior guidance for $20 – $22 million. The company’s share price fell 17% following the news. Neil Craig the Executive Chairman of Craigs Investment Partners is the Chairman of Comvita Limited.

Orion Health had a comparably bad week, after the company announced that due to delays in signing a number of contracts, it is expecting a full year loss of between $32 and $38 million. Orion remains committed to reaching profitability in FY18 saying that the pipeline remains strong, however, a capital raising is now a distinct possibility. Following the announcement the company’s share price fell 14% two days in a row, taking it to all-time lows.

Globally, investors sat tight, reflected in much lower than usual trading volumes. The increased concern came ahead of the first meeting between US President Donald Trump and Chinese President Xi Jinping. The leaders from the globe’s two largest economies were still to meet at the time of writing with concerns that brash President Trump would offend conservative Xi, and that the leaders had only one thing in common; to return their respective nations to their former greatness. Expectations for agenda items include trade after Mr Trump spent much of his campaign talking about cracking down on imports from China which would include a 45% tax on goods, and North Korea.

The other important data release due out Friday in the US (Saturday morning NZ time) is the US non-farm payroll, with expectations for a further 175,000 jobs to be added. The market will be watching for signs of increasing wages while unemployment is anticipated to remain steady at 4.7%. Earlier in the week, private sector employment showed a strong gain, adding 263,000 jobs, exceeding expectations for a gain of 170,000.