Craigs Investment Partners Research Team, 20 September 2019

It was a mixed week for markets as investor sentiment turned cautious due to a spike in oil prices and heightened geopolitical tensions. Back home, there was plenty of corporate news flow to keep investors on their toes.

In local economic news, New Zealand’s gross domestic product (GDP) lifted 0.5% over the June quarter, or 2.1% annually, in line with the Reserve Bank’s forecast. The increase was largely driven by the service sector, which represents about two-thirds of the economy. Meanwhile, New Zealand's economy hit a milestone with annual GDP reaching $300bn for the first time. Nonetheless, annual GDP growth sits at its lowest in six years.

Shares in Kathmandu jumped 6.8% on the back of a strong result with the outdoor clothing retailer saying sales continued to grow in key markets. Operating earnings rose 12.7% and net profit after tax increased 13.6% on the prior year. Its North American Oboz business continues to grow strongly, with sales growth of 30%. Online sales were also strong, up 9.2%, assisted by the re-platforming of its online offering. The company declared a final dividend of 12 cents per share, bringing the full-year payout to a record 16 cents.

Z Energy on Monday said it was committed to working with the Commerce Commission but could not agree with the profitability analysis in the Commerce Commission’s draft report. Z Energy said it has discovered a number of inaccuracies in the draft findings on profitability, including a misrepresentation of the company’s 2016-2018 rate of return. Z Energy alerted the Commission to these errors and provided a detailed analysis throughout its submission. Following a profit downgrade last week, Z shares fell to their lowest since November, however managed to bounce slightly later in the week.

Global dairy prices have risen for the second time in the past nine auctions, with the headline index up 2.0%. Key product group, whole milk powder, lifted 1.9% and skim milk powder rose 3.4%. The price of lactose increased 5.6% and butter climbed 2.7%. The strength in prices was likely linked to fewer volumes sold. Rennet Casein was the only product to mark a decline, falling by a modest 0.1%.

Across the ditch, Bellamy’s Australia received a A$1.5bn takeover bid from China Mengnui. The Chinese dairy company offered A$13.25 per share for Bellamy’s, a 59% premium to the stock’s last closing price. Shares in Bellamy’s shot up 55.0% on the news. Mengniu’s rival, Inner Mongolia Yili Industrial Group, bought New Zealand’s Westland Co-operative Dairy Co in July.

Australia’s unemployment rate rose to 5.3% in August, worse than expectations for the rate to hold steady at 5.2%. Hiring surged by 34,700 over the month, more than double the 15,000 expected. However, full-time employment fell by 15,500, indicating the rise in hiring was driven by part-time workers. Following the release of the report, market expectations for the Reserve Bank of Australia to cut its cash rate by 25 basis points, when it meets in October, increased from 21% to 70%.

Following a two-day policy meeting, the US Federal Reserve announced that it would cut its benchmark interest rate by a quarter point on Thursday morning, to a target range of 1.75% to 2.0%. The policy statement had almost no change of language from its July statement and cited “the implication of global developments for the economic outlook as well as muted inflation pressures.” Chair Jerome Powell said that the central bank may have to start to organically grow the size of its balance sheet in a bid to guarantee liquidity during difficult times. Unsurprisingly, President Donald Trump slammed the Fed Chair in response, tweeting “Jay Powell and the Federal Reserve fail again. No guts, no sense, no vision. A terrible communicator!” The Fed next meets at the end of October.