Craigs Investment Partners Research Team, 4 October 2019

This week global markets were driven by heightened concerns of slowing economic growth following weak manufacturing data out of the US and Europe, while the World Trade Organisation gave the US the go-ahead to apply tariffs on up to US$7.5bn of European Union goods. Across the ditch, the Reserve Bank of Australia cut interest rates once again, and back home, business confidence levels fell further.

ANZ business confidence levels dropped to ‘dismal levels’ in September. The latest ANZ Business Outlook survey has again fallen further, with business sentiment at levels last seen in the Global Financial Crisis. The overall business sentiment measure is at its lowest level since April 2008, while firms’ expectations for their own activity over the year ahead fell to the lowest level since April 2009. This suggests that Reserve Bank Governor Adrian Orr’s unexpected 50bp rate cut has done little to improve business sentiment or investment and employment intentions.

Kathmandu to acquire Rip Curl for $368m. Outdoor equipment retailer Kathmandu is looking at becoming a billion-dollar company if shareholders approve the acquisition of surf brand Rip Curl on October 18. If approved, the purchase is to be finalised by the end of the year and lift Kathmandu’s earnings by 10% for the 2020 financial year. CEO Xavier Simonet said the acquisition was “fantastic” and would let the outdoor company “grow and diversify.”

Gentrack took a hit this week after downgrading profit guidance again. The company downgraded its operating earnings guidance on Monday to a range of $25m-$26m, down from $27m-$28m due to increased bad and doubtful debt provisions in relation to the UK utilities market. This marks the company’s second downgrade since July when Gentrack said it wouldn’t achieve its earlier target of exceeding $31m.

Global Dairy Trade prices edge higher. Dairy product prices gained modestly at the latest Global Dairy Trade auction early Wednesday morning, however, key product group, whole milk powder fell 0.2%. Butter milk powder led the gains, up 6.7%, while skim milk powder hit a four-year high, up 2.7%, with increased demand for the product from Asian markets. At the other end of the spectrum, Cheddar declined 3.4%.

The Reserve Bank of Australia (RBA) cut its interest rate once again. The Australian sharemarket had been trading flat on Tuesday, before the RBA board’s decision to cut the official cash rate to 0.75%. Reserve Bank Governor, Philip Lowe, cut the rate by 25 basis points, saying an extended period of low interest rates will be required to reach full employment and achieve the inflation target. The benchmark index jumped 0.8% following the news, whist the Australian dollar dropped to a one month low against the US dollar.

US markets dropped on the back of weak manufacturing data. Wall Street tumbled on Tuesday after US factory activity shrank in September to its weakest in more than a decade, this followed weak manufacturing data out of Europe. The Institute for Supply Management (ISM) showed a reading of 47.8, down from 49.1 in August and below expectations of 50.1. A reading below 50 indicates contraction. Economists noted the disappointing data may also reflect the ongoing strike at General Motors, which has also begun to affect production.

World Trade Organisation (WTO) slashes 2019 forecast for global trade growth. Europe’s Stoxx 600 declined almost 3% on Wednesday, its worst day since December, after the WTO downgraded its forecast for growth this year by more than half. Additionally, Germany's leading economic institute cut its economic growth forecast for this year and next, citing the weakening global demand for capital goods exports. The growth forecast for this year was lowered to 0.5% from 0.8% and the outlook for next was trimmed to 1.1% from 1.8%.