INSIGHTS

MARKET SUMMARY: 23 TO 27 APRIL

Research Team, 27 April 2018

The rollercoaster ride for markets has continued this week as caution has again gripped investors’. The 10 year Treasury bond yield in the US rose above 3% for the first time since 2014 as inflationary fears crept back into markets. The focus overseas has largely been on the reporting season which is expected to be the best we have seen since 2011. Results are being carefully monitored and, while strong performances are being rewarded with share price gains, any perceived weakness has been punished. Locally, it has been fairly quiet for markets and volumes have been low with the holiday shortened week and school holidays taking investors away.

New Zealand saw annual net migration fall in the year to March to 68,000. This was significantly below the high of 72,400 from July 2017. Although this remains high by historical standards it is in keeping with market expectations for a slowdown this year. Net migration was made up of 130,800 migrant arrivals and 62,900 migrant departures, as more non-New Zealand citizens were leaving the country. The largest group of migrants coming to New Zealand were on work related visas, with the most numbers coming from the United Kingdom, France and Germany.

Across the Tasman, Australian inflation on annualised basis climbed to 1.9% for the first quarter. Although this was in line with the previous quarter, it remains below the target range of 2%-3%, suggesting the Reserve Bank of Australia is likely to keep interest rates on hold for the rest of the year. The quarterly consumer price index climbed 0.4% but was below estimates of 0.5% and down from 0.6% posted in the previous quarter. The biggest sector gains for the quarter were secondary education and gas and other household fuels. The laggards were international holiday, travel and accommodation and computing media and services.

Last week saw a positive start to reporting season in the US, however this week has been slightly less upbeat. The implications of rising US bond yields weighed on investor sentiment. The 10-year US Treasury yield broke through the psychologically important 3% level on Tuesday, for the first time since 2014, leaving investors contemplating what it would mean to markets and the global economy. Meanwhile, the US dollar climbed to its highest point in three months. A highlight for us this week was Alphabet’s (Google’s parent company) result. The company beat estimates for revenue and earnings growth however its share price dropped 5% as margins came under pressure.

Thursday morning saw an announcement for a potential takeover bid from Filipino poultry group Bounty Fresh Foods for chicken producer, Tegel. The proposed $437.8 million takeover bid came at a 50% premium to Tegel’s closing price, prior to the announcement. Tegel issued a downgrade of earnings in March from $31m in 2017 to $25-27m in April. The takeover is subject to a number of conditions, including Tegel’s full year results are not more than 10% below March guidance for underlying earnings of $70m and net profit of $25m.

Fletcher Building came out of its trading halt on Friday and saw the share price slightly recover after hitting multi year lows. The company executed a capital raising and established a new standby banking facility of $500 million. The $750 million entitlement offer is being used to strengthen the balance sheet and enable the company to refocus its portfolio. The company also announced that it would be divesting two businesses; Formica and Roof Tile Group.

Japanese Pharmaceutical company Takeda has upped its bid to £46 billion for biotech firm Shire, which would make it the biggest takeover this year. Takeda investors reacted negatively to the increased the bid, and the company’s share price dropped 7%. Takeda is down around 20% since it was first revealed they were considering a takeover.  Takeda is interested to acquire Shire in order to boost its global presence and get hold of its portfolio of rare diseases, which have high profit margins. The deal would make it the third biggest acquisition of a UK company in history.