Business & Investing: Fears over China’s biggest property developer, plus political risk in the US over the country’s debt ceiling, lead to drops on major exchanges
A week can be a long time in financial markets.
This time last week the NZ sharemarket was riding a wave of optimism after recording its best month of the year in August, while 11 of the previous 13 sessions had finished in the green, despite Auckland remaining in Level 4 lockdown.
Fast forward seven days and it appears the ‘lockdown bounce’ could be over, for now. Investors seem to be retreating to the sidelines after an abrupt reality check mid-week amid growing concerns the Reserve Bank could begin hiking the OCR with a 50bp increase in October and Auckland’s ongoing lockdown potentially being extended.
Unusually, the NZX50 closed at its low on three consecutive days last week, ending Friday at 13,064, down 1.7 percent for the week and wiping out all of the previous two weeks’ gains.
A2 Milk shares continue to trade lower, falling a further 4.5 percent last week following its recent disappointing full year result. Its shares are now down more than 20 percent since August 25.
Ryman Healthcare shares fell 5 percent to $15.00, Meridian Energy eased 2 percent to $5.10, while travel software developer Serko fell 7.3 percent to $7.69
Across the Tasman, Australia’s ASX200 fell 1.5 percent to 7,406 after BHP shares slumped to a nine-month low as falling demand from China continued to weigh on the resources sector.
US equities capped off their worst week in nearly three months with the S&P500 falling 1.7 percent as renewed concerns about inflation dented optimism over continued central bank support for financial markets.
Investor confidence was knocked on Friday when data showed US factory gate prices rose 0.7 percent month on month in August, which exceeded economists’ expectations for a 0.6 percent increase.
The rise reinforced ongoing concerns over elevated cost structures as supply chain disruptions caused by the Covid-19 pandemic persist, pushing up material costs.
But two ominous new clouds appeared on the horizon this past week that could prove to be potential headwinds for global equity markets in coming months.
Recently it was China’s technology stocks, including Alibaba and Tencent, making the headlines as their share prices slumped in the wake of a government crackdown on their business models.
Now China’s largest property development company Evergrande, which also has the dubious distinction of being the world’s most indebted company with liabilities in excess of NZ$400 billion, is teetering on the brink of collapse. Recently its bonds have plunged in value, while its share price has slumped 75 percent since December.
Global credit rating agencies including Fitch and Moody’s last week slashed their outlook on the company’s debt, leaving markets increasingly worried about the ramifications a collapse would have on China’s heavily indebted construction sector which accounts for around 26 of the country’s GDP.
Moody’s said Evergrande was “out of cash and out of time” referring to hundreds of unfinished residential buildings and angry suppliers who have shut down construction sites. The company has even started to pay overdue bills by handing over unfinished properties.
The other potential headwind involves the US debt ceiling, which is due to expire in the coming weeks. Treasury Secretary Janet Yellen told US financial regulators recently that if Congress fails to address the debt ceiling, there may be “financial stability implications.”
The fallout from not raising the limit in a “timely manner” was among topics raised at a private meeting last week of the Financial Stability Oversight Council, the US Treasury Department said in a statement. Yellen has campaigned vigorously for congressional action in recent months, warning that the Treasury would probably reach the borrowing limit sometime in October.
After US lawmakers temporarily suspended the borrowing limit back in 2019, it’s now once again a matter for separate debate, inviting partisan bickering. If agreement isn’t reached to increase the debt ceiling, the Treasury will gradually run out of money, shutting down parts of the US Government and potentially spooking markets as a result.
The increasing market tensions saw the closely watched volatility index (VIX) – sometimes referred to as Wall Street’s fear gauge – surge 28 percent last week to its highest level since March.
Cryptocurrencies also slumped in the wake of the market selloff, with Bitcoin falling 12 percent to US$45,500, its biggest weekly slide since May.
On commodity markets, gold fell 2.2 percent to US$1787 an ounce as US treasury yields continued to push higher with the 10 year gaining a further 1.4 percent to 1.344 percent, while Brent Crude oil futures gained 0.6 percent to US$72.86 a barrel.
The NZ dollar weakened slightly against the greenback easing 0.5 percent to 71.1 US cents.
WEEK IN REVIEW
Sanford shares were the big mover of the week, briefly surging more than 20 percent after South Island iwi investment group Ngāi Tahu Holdings made a surprise on-market bid to acquire 20 percent of the seafood company at $5.50 per share. The acquisition came a day after Sanford shares fell to their lowest level since May after reporting increased operating costs and reducing profit margins. Ngāi Tahu Holdings chief executive Mike Pohio said the long-term outlook for the seafood sector was underpinned by growing global demand for protein. Sanford shares closed on Friday at $5.03 having traded as low as $4.45 earlier in the week.
Synlait Milk announced plans to cut 15 percent of its work force in order to “reset” the business and generate annual savings of approximately $10m to $12m. CEO John Penno said the company’s systems needed to chase the growth it wanted to achieve. “This is not just a cost-out exercise, it is a complete reset of how we operate as a business” he said. A consultation process with affected workers and union groups will take place over the next two weeks. Synlait said it would provide a further update at its full-year results announcement later this month.
a2 Milk added to its recent share price slump with news the infant formula manufacturer is set to be dropped from the S&P ASX 50 large-cap index. The company’s market capitalisation has fallen to A$4.26 billion, which will see it bumped out of the index next week. The threshold for inclusion is A$5 billion. The company, however, will remain in the S&P ASX 100, 200 and 300 indices.
Mainzeal’s former directors will face the next stage in their long running legal dispute in the Supreme Court after leave was granted for appeals and cross-appeals by both directors and liquidators of the failed construction firm which collapsed in 2012. In March, the Court of Appeal ruled Mainzeal directors Richard Yan, Jenny Shipley, Clive Tilby and Peter Gomm were liable for breaching the Companies Act, but on different grounds from an earlier High Court judgment. While the High Court had previously set the penalties at $36 million between the directors, the appeal court found another breach of the act and sent the case back to the High Court to determine the additional penalties.
Ryman Healthcare announced the appointment of Richard Umbers, a former Progressive Enterprises managing director, as its new chief executive to succeed Gordon MacLeod when he steps down next month. Ryman has five villages open in greater Melbourne and owns sites to build seven more there in addition to the 38 villages it owns in NZ. Umbers will be based at Ryman’s head office in Christchurch.
Pacific Edge was forced to refute information released by the Australian Stock Exchange (ASX) regarding a significant pending capital raise saying the information was “incorrect” and had subsequently been withdrawn. The cancer diagnostics company asked NZ RegCo to place its shares in a temporary trading halt while it sort to clarify the botched announcement. Media reports had suggested the company was looking to raise A$70 million (NZ$72.8m) at A$1.20 per share alongside its upcoming dual listing on the Australian stock exchange. Pacific Edge said this was not correct and was “due to incorrect information inadvertently being released by the ASX.” Pacific Edge shares initially fell almost 5 percent following the announcement.
Rocket Lab’s first result after listing on the US Nasdaq exchange revealed a hefty loss despite a surge in revenue. The New Zealand-founded, US-based space company recorded a net loss for the six months ended June of US$32.5 million despite a 237 percent increase in revenue versus the same period a year earlier. The loss was up 39 percent from US$23.8m in the same period in 2020. Rocket Lab shares ended the week at US$18.69, up more than 80 percent since listing on August 25.
Infratil is committing US$233 million to set up a renewable energy development platform headquartered in Singapore called Gurin Energy. Infratil CEO Jason Boyes said Asia offered a significant opportunity for Infratil to enter markets which are following a “transition to renewables” roadmap. Infratil already has a similar platform in the United States, Longroad Energy, in which it had $325.9m invested. In February last year it set up Galileo Green Energy in Europe, committing €88m over two or three years, while last month it completed the sale of its 65 percent stake in Australia-based Tilt Renewables for $1.98 billion realising an estimated gain on book value of $965m.
COMING UP THIS WEEK….
- Food Price Index (Aug) – Stats NZ
- Briscoe Group Half Year Result
- Third Age Health Services AGM
- Geneva Finance AGM
- Balance of Payments (June Qtr)
- GDP (June Qtr)
- Vehicle registrations (Aug)