INSIGHTS

MARKET SUMMARY: 26 FEBRUARY - 2 MARCH

Research Team, 2 March 2018

The roller-coaster month of February is now behind us and it saw many markets break lengthy winning streaks. The NZX50 was no exception although didn’t plummet to the lows seen in offshore markets. For February the index finished down 0.81%. Although on the face of it this sounds like a lot, it is important to put it into context.

The NZX had risen for 13 months in a row. It had also seen six consecutive years of gains, with the average yearly rise over this period being 17.1%. Although we also note that the NZX50 index is a gross index, so this figure also includes dividends, it is still an incredible run. Despite the 0.81% fall, the NZX50 is around100 points away from its all time high set in January. This is around 1.2% from where the index is sitting at the time of writing.

Given the bull market we have seen over recent years, we felt a pull back was a healthy thing for the market and have been waiting for it. Globally a number of markets entered correction territory during February, however rebounded quickly. This week has seen inflation fears creep back particularly following new US Federal Reserve Chair Jerome Powell’s testimony to Congress. Powell’s speech talked about the US economy’s strength, which sparked fears of further rate hikes this year. As rate hike expectations grow, bond yields have climbed again and a renewed sell down was sparked in global markets later in the week. The S&P 500 fell 3.9% in February, snapping its 10 month winning streak while the FTSE 100 in the UK fell 4.0% and the broader Stoxx 600 saw a 4.0% decline. The ASX 200 in Australia saw a more muted decline of just 0.4% and had even swung into positive territory for the month boosted by strong performances from the banking and resources sectors, and was boosted by strong results from the reporting season.

The local reporting season is now at an end and it was exceptionally positive for a large number of our NZX50. As always there were some results that stood above the rest while some lagged and this season was no exception.

The top performer over the period was without doubt a2 Milk (ATM). The company had a stellar result increasing earnings and revenue above expectations. In addition to this, the company announced a new strategic alliance with global dairy giant Fonterra. The alliance opens up distribution channels for ATM and firms up supply that will help to meet the strong demand for its infant formula products. For the month, ATM gained 43.8% although finished below its new all time high of $14.65. Peer Synlait Milk (SML) also had an exceptional month, although the gains were not as strong as ATM’s, rising 12.0%. SML announced it had purchased a new site in the Waikato where it will be building another dairy factory to keep up with demand for nutritional powders.

The biggest laggard for the month was Fletcher Building, falling 16.7%. The company announced further losses for its building and interiors division, adding more bad news to the numerous downgrades the company has seen over the past year. The losses were announced following a trading halt and also saw Chairman Sir Ralph Norris step down from his position. New CEO Ross Taylor believes that the company has now appropriately accounted for the losses in the buildings and Interiors division and has said that the company will not be bidding on anymore projects in this division in the foreseeable future.

This week’s biggest disappointment came from Sky TV, as the pay TV operator continues to face headwinds from increasing competition from digital providers. This is impacting the company’s subscriber numbers as well as the cost of the content it provides. SKT cut its interim dividend in half while also announcing a new pricing plan in the hopes of gaining new customers by providing a lower entry point. Following its result the share price fell 9.6%.

Coming up, there are a number of events which could impact markets, the nearest being the Italian election to be held on Sunday 4 March. Italy is a weak spot in the European Union with a large percentage of its population unhappy with being in the EU as its economy shows no sign of improving – public debt currently stands at 133 per cent of its GDP. This election will be watched closely with populist party M5S leading in the latest polls.