Research Team, 23 February 2018

Reporting season has been front of mind for investors this week locally, with a plethora of results from some of our largest companies. So far, the reporting season has been reasonably positive, and companies have been rewarded for earnings beats. It has been a similar story across the Tasman, with plenty of results driving the Australian market as well.

Without doubt, the standout performer for the week has been a2 Milk. The company announced a strong first half result with its after tax profit rising 150% from the prior comparable period. Earnings were $143 million, up 123% for the period as the company increased its market share in both Australia and China. Management commented that its distribution network continues to grow while its brand continues to gain momentum. In addition to the stellar result, ATM announced it has formed a Global Strategic Partnership with Fonterra. The deal includes a supply agreement, distribution and sales arrangements and the license for Fonterra to sell fresh A2 milk in New Zealand. With such incredible numbers and a new strategic relationship, ATM’s share price rocketed higher, finishing the day up 26.48% at $11.75. The gains also mean that a2 Milk is now the biggest company on the NZX by market cap, beating out other heavyweight Fisher & Paykel Healthcare and Spark for the top spot.

The latest Global Dairy Trade auction saw a slim decline in prices with the GDT price index slipping 0.5%. The decline follows three consecutive auctions of strong gains as potential supply issues saw prices rise. The decline was not unexpected with futures pointing to a flattening out of prices. In addition to this, the auction was held during Chinese New Year celebrations which likely means bidding from the region was slower. Importantly, the whole milk powder price actually rose at the auction. Fonterra is expected to update the market soon on its forecast farmgate milk price payout for the current season. It is currently sitting at $6.40 per kilo of milk solids after it was downgraded in December.

Global markets have certainly been a volatile place over recent weeks, after inflation fears in the US triggered a global sell off. Markets around the world entered correction territory following this sell off, however have now rebounded somewhat, although are still well below the all time highs set in January.

The release of the US Federal Reserve minutes were certainly in focus this week, with many wondering if their release might spark yet another selldown. The minutes remained dovish however and the central bank remains steadfast in its belief that there will be another three rate hikes this year. The market is predicting a 99% chance of a rate hike in March, implying that it is all but done. It is expected that the next hike is likely to come in June, with the market pricing in a 65.7% chance of a further hike there. Although the commentary was dovish, inflation fears remained front and centre, sending 10 year treasury yields to a four year high and putting downward pressure on the equity market.

Flash manufacturing PMI’s were released in the US, Japan and Europe during the week, giving us an early look into how these economies are tracking. In the US the PMI reached 55.9, the highest it has been in more than two years. A reading above 50 indicates sector expansion, so this reading implies that the economy is tracking well. In Japan, the flash PMI showed a small decline from the previous month with a reading of 54.0. Despite the small decline from the January reading, it is still a strong reading and remains near four year highs. Eurozone business growth remained robust, however also showed a small decline from January’s reading, dipping to 57.5 from 58.8.

Next week, we will be continuing to monitor reporting season locally with another busy week expected. There are plenty of data points due out as well to keep the market busy including migration data from January. Next week also marks the end of February, which has been a pretty tough month for markets.