INSIGHTS

MARKET SUMMARY: 16 TO 20 APRIL

Research Team, 20 April 2018

With reporting season now underway in the US and plenty of economic data to process, the trade drama and rising geopolitical tensions from the past few weeks have been put to the side for the moment at least. Markets have benefitted from the positive earnings season as well as rising commodity prices.

It has been a busy week for the New Zealand market with plenty of corporate newsflow to keep investors on their toes as well as a few scheduled releases. Fletcher Building stole headlines early in the week, announcing that it would go into a trading halt while it executed a capital raising. The $750 million entitlement offer is to strengthen the balance sheet and enable the company to refocus its portfolio. Shares were being offered to existing holders as $4.80, representing a 23.4% discount to the closing price.

In addition to the capital raising, Fletcher Building has had to establish a new standby banking facility of $500 million. The company also announced that it would be divesting two businesses; Formica and Roof Tile Group. This will allow Fletcher Building to refocus its portfolio on its Australian and New Zealand activities. This is the latest in a string of news from Fletcher’s, which has included numerous downgrades to its Buildings + Interiors division and seen many staff changes. It has also followed rumours that Australian conglomerate Wesfarmers was looking to acquire the company.

Comvita also grabbed headlines, downgrading guidance for the full year as honey production remains hampered by poor weather. However the downgrade was accompanied by the news that a possible suitor for the company was undertaking due diligence, and there could be a takeover offer looming.

The a2 Milk Company provided some more upbeat corporate news, announcing that it has signed an agreement with Yuhan Corp in South Korea. Yuhan, a pharmaceutical company, has the exclusive sales and distribution rights for a2 Milk.

The latest Global Dairy Trade auction ended a four auction losing streak and saw the headline index gain 2.7%. All products on offer saw price gains at the auction with the biggest gain coming from Lactose. Whole milk powder saw a narrow gain of 0.9%, adding to the price rise from the previous auction. Fonterra’s forecast payout for the 2017/18 season is $6.55 per kilo of milk solids and is the highest it has been since the record 2013/14 season.

The most anticipated event of this week in New Zealand was the release of the Consumer Price Index (CPI). For the quarter, inflation was 0.5%, above the RBNZ estimate for 0.4% and in line with analyst expectations. The annualised change was in line with expectations, with prices increasing 1.1%. For the year, housing and household utilities was the main segment behind the increase in prices, while alcohol and tobacco saw the biggest increase on a quarterly basis due to increased taxes on tobacco.

The UK also released inflationary figures this week for March, and surprised the market to the downside, dropping to the lowest level in a year. Prior to this, expectations were for the Bank of England to further tighten monetary policy before the end of the year, however, following the weaker inflation, this has changed. The British pound dropped sharply following the news,

Reporting season is taking headlines and certainly helping investors to shrug off recent market uncertainty. Although still in the early stages (only around 25% have reported so far), it has been a positive start and this is expected to continue. Prior to the earnings season beginning expectations were for this quarter’s earnings growth to be the best since 2011. Next week reporting season ramps up and we will have plenty of corporate newsflow to process including results from Alphabet (Google), 3M and Visa.