INSIGHTS

MARKET SUMMARY: 9 TO 13 JULY

Research Team, 13 July 2018

The NZX 50 came off the boil this week, after reaching multi record highs last week. However turnover was light as the first week of the school holidays commenced. On the contrary, global markets started the week on an upbeat note, following better than expected jobs data out of the US and looked ahead to what is expected to be another strong corporate earnings season. Yet, markets turned to the downside after the Trump Administration proposed 10% tariffs on an additional US$200 billion worth of Chinese goods. Investors have been rattled by the recent escalation in trade relations, however a strong corporate earnings could outweigh the negative sentiment.

Overall, it is expected to be another impressive reporting season, with markets expecting revenue growth of 8.8% and 20.0% earnings growth for the S&P 500. This would make for the second strongest quarter for earnings since 2010, and the second consecutive quarter of earnings growth of at least 20.0% per annum. All 11 sectors are forecast to see an increase in earnings from a year earlier with energy, materials, telecommunications and technology expected to post the strongest growth rates.

Global markets were given a boost at the start of the week after a positive US jobs report. The US economy added 213,000 jobs in June, beating expectations, after surging up by an upwardly revised 244,000 jobs in May. This makes it the third strongest month this year and brings the total to nearly 1.3 million year-to-date. The increase in the labour force is an encouraging sign because a surge of workers returning to the labour force attributes to strong job prospects as well as rising wages. On that note, wages rose by 2.7% over the past year, improving from the 2.4% average over the past four years. Meanwhile, the US unemployment rate rose to 4.0% in June from 3.8% in May, which was the lowest reading since 1969. The increase was thought to have been impacted by the number of temporary school jobs ending for the summer.

Over in the UK, Theresa May urgently needed to reshuffle her team after a string of resignations over her Brexit strategy plunged her government into crisis. Health Secretary, Jeremy Hunt, has been named as the new Foreign Secretary after Boris Johnson quit, accusing May of pursuing a ‘semi-Brexit’. His departure followed that of Brexit Secretary David Davis, as well as a string of junior ministers. May said she was “sorry – and a little surprised” by Johnson’s move after his apparent recent support.

In corporate news, market darling, The a2 Milk Company, provided a FY18 trading update and FY19 outlook to the market on Thursday. The company said revenue generated in the 2018 financial year was $922 million, representing growth on the prior period of 68%. This was ahead of market estimates of $914 million. The company expects EBITDA margins of approximately 30%, which was also slightly ahead of expectations of around 29.6%. Looking ahead and assuming general conditions don’t change, the company expects further growth in revenue, particularly in respect of nutritional products as well as higher overhead costs in FY2019.

Retirement village operator, Summerset Group, advised that its underlying profit for the six months ending June is forecast to be between $43 million and $45 million. This reflects growth of between 21% and 26% on the same period of 2017. The company will release its annual earnings on August 22.

Skellerup announced that it is acquiring a 35% stake in US-based liquid silicone rubber manufacturer, Sim Lim, for US$1.1 million. The odourless and hygienic properties of liquid silicon rubber, is suited for sterile environments and are used in high-precision medical and consumer products. The product will help Skellerup’s strategy to focus on highly specialised rubber and plastic componentry.

Off the main index, transport technology services company, EROAD, saw its share price tumble this week following the release of its quarterly update. Unit sales for the first quarter were much slower than expected, as many deals have been pushed out beyond the quarter.