Research Team, 29 March 2018

The holiday shortened week has been a bumpy one for markets as we round out the end of the first quarter of 2018. The NZ index has held up well when compared to its global peers as concerns over potential trade wars continue to keep a lid on markets. Although it wasn’t a data heavy week, corporate newsflow kept investors interested while the ANZ Business outlook survey showed some positive signs.

Sky TV grabbed headlines again this week and again it was for all the wrong reasons and sent the share price lower again. The company announced that it was not the preferred bidder for the television rights to the Rugby World Cup. In the past, this has been a massive draw card for Sky TV and has seen subscriber numbers increase. The company has been under significant pressure so far this year, as competition continues to increase from digital subscription services for both content and customers. Long time CEO John Fellet also announced he would be stepping down from his role, although will remain in place until a suitable replacement is found. For the year to date, the company’s share price is down more than 20%.

Market darling a2 Milk fell from grace this week, following the announcement that global food giant Nestle has released a competing A2 infant formula in China. This sent a2’s share price down sharply as investors worry about the potential impact on the company’s growth outlook, particularly because Nestle already has strong distribution channels in China. However, the move by Nestle isn’t all bad news for ATM. It is expected that Nestle’s foray into the niche market will raise the profile of the A2 protein, increasing the size of the market. Despite the recent weakness, a2 Milk remains the top performer on the NZX50 for the year to date, up around 50%.

New Reserve Bank of New Zealand Governor Adrian Orr started this week, taking over from interim Governor Grant Spencer. Prior to his appointment as Governor, Adrian Orr was the CEO of the New Zealand Super Fund and has also been deputy Governor and head of financial stability for the RBNZ. Orr started his tenure by signing a new Policy Target Agreement (PTA) with Finance Minister Grant Robertson. The new PTA was one of the Labour government’s campaign promises and the market was watching with interest for any changes. As was widely expected the new PTA included an employment component, saying that employment outcomes must be a consideration when making monetary policy decisions. The target range for inflation remains between 1% and 3% with a focus on keeping future inflation at the mid point of 2%.

The ANZ Business outlook survey was one of the highlights on this week’s calendar, after February’s survey saw a reasonable jump from the lows logged late last year. The 12 month outlook took a tumble following the election in September last year, and although it has recovered from the lows, pessimists continue to outweigh optimists on a 12 month view with a net 20% of business surveyed pessimistic. The own activity index, which is more closely correlated with GDP, lifted to +22. Retail and agriculture were the more pessimistic sectors of the economy while manufacturing and services were the most optimistic. Hiring intentions increased in March as did net investment and profit expectations.

Globally, trade continues to be the hot topic for markets with US President Donald Trump lining up potential trade tariffs for imports from China in retaliation to intellectual property theft. Trump has also said he wants to reduce the trade deficit the US has with China. China came back with proposed tariffs on US goods as well, although both sides have said they are open to discussions. The uncertainty around the protectionist policies being implemented by the US, as well as the potential retaliatory moves from across the globe, are creating an overhang for global markets and investors are taking a risk off stance, heading for safe haven assets. Gold prices have seen some support, as has the yen in Japan.

Still to look forward to this weekend, is the PMI data for China, which will give us insight into how the world’s second largest economy is faring. We will be watching the Reserve Bank of Australia’s announcement next week, although interest rates will more than likely remain on hold. At the end of next week, the next non-farm payroll data will be released and will again be watched closely for labour market trends especially wage inflation.