Research Team, 12 October 2018

Global markets saw some upheaval this week, especially mid-week with Wall Street experiencing a sharp correction, due to fresh concerns surrounding the trade war with China and worries of rapidly rising interest rates sent Wall Street into sell off mode. Tech shares were particularly hard hit, with the Nasdaq Composite index suffering its worst day in seven years.

With equity markets in the US having run so hard and valuations looking stretched in places, many would argue a correction is not only overdue, but is healthy. The three main US indices remain in positive territory for the year to date (as at the time of writing).

In other news, the International Monetary Fund (IMF) dropped its global growth forecast for 2018 and 2019 to 3.7 per cent from 3.9 per cent, while keeping the US growth forecast for 2018 unchanged at 2.9 per cent, but reduced its 2019 growth forecast down to 2.5 per cent, citing trade conflicts. The IMF also sounded the alert on the global trade war saying it could take a significant bite out of global growth.

Locally our benchmark NZX 50 Index has seen a series of daily falls so far this month, and is down 3.2 per cent over the past eight days (as at the time of writing). However, the local bourse is still currently up 7.8% for the year to date.

At a company level, Fonterra, the world’s biggest exporter of dairy, has cut its 2018/2019 forecast Farmgate Milk Price from $6.75 per kgMS to a range of $6.25 - $6.50 per kgMS. While this is a downgrade to farmer suppliers, it is more positive for Fonterra as it effectively lowers their key input cost, milk.

Retirement village operator, Summerset, announced that it has purchased an eight-hectare property in Papamoa Beach, which will be its first Tauranga retirement village. The company wants to build a 280-unit village on the site, offering two- and three-bedroom villas and serviced apartments, a care centre and rest home with hospital-level care and a memory care centre.

In Australia, Ramsay Generale de Sante, the French subsidiary of Australia's Ramsay Health Care increased its offer for Swedish healthcare group Capio to 8.19bn Swedish kronor, having seen an earlier bid dismissed. The new offer is 20% higher than the previous offer and has been endorsed by the Capio Board.

In Australian economic data, the NAB business conditions index improved for September and appears to have stabilised after declining earlier in the year. Business confidence also ticked higher, to be around its long-run average. While conditions remain broadly favourable across industries, the retail industry remains the weakest, driven by a subdued outlook for the consumer and ongoing structural changes in the sector.

Turning back to global markets, the beginning of the global reporting season for the third quarter is set to begin. As always, some of the banking heavyweights in the US will be among the first to report results. Very impressive earnings growth has been a key reason for the strong performance from equity markets in 2018, particularly in the US.

Based on current forecasts, the S&P 500 is expected to deliver another healthy quarter in this regard, the third strongest since 2011 (behind the March and June quarters of this year). Overall earnings growth (relative to the same period a year ago) is forecast to be 19.3%, with energy, financials and materials predicted to see the biggest gains. We will be watching for any evidence or commentary on the impact of trade tariffs, a stronger US dollar, higher interest rates and the effect of increasing wage and cost pressures on profit margins.