Business & Investing: NZ market edges towards levels not seen since before the 2020 Covid sell-off
The NZ sharemarket fell to a three-month low this past week as investors remained increasingly on edge about elevated inflation risks, rising bond yields, supply chain disruptions and growing uncertainty about the year ahead, particularly the economic impact of rising interest rates and ongoing Covid-related disruptions.
The NZX50 ended the week down 1.3 percent, closing at its low of 12,908 and well off the 13,000 support level which it had managed to hold in recent weeks. The index is also edging ever closer to its 60 day moving average at 12,714, a level it hasn’t breached since the onset of the Covid-19 sell-off in March last year.
The market was dragged lower on Friday due to falls in market heavyweights F&P Healthcare (down almost 6 percent for the week) and a2 Milk which fell 6.7 percent after being removed from the MSCI world index, requiring fund managers to reduce their holdings in the company in the coming weeks.
Former market darling Pushpay Holdings saw its shares punished after reporting weaker than expected earnings for the half year to September. The company’s sluggish growth rates also disappointed investors which saw its shares plunge 22 percent for the week, its biggest weekly decline since listing in 2014.
Mainfreight, which has been one of the market’s best performers this year, reported a 41 percent lift in revenues for the half year to September compared with last year.
In Australia, the ASX200 fell 0.2 percent for the week to 7,443 while in the US the benchmark S&P500 index fell 0.3 percent to 4,683, its first weekly decline in six weeks.
Inflation once again dominated the week’s market action in the US after Consumer Price Index data showed that inflation in October had risen at a rate of 6.2 per cent from the previous year, well above market forecasts. In response, shorter-dated Treasury bonds sold off sharply, as investors bet the US Federal Reserve will be forced to lift interest rates sooner than previously expected. The US 10-year Treasury yield surged 7.6 percent to 1.566 percent, while the US dollar index jumped more than 1 percent to a 16 month high of 95.12.
US inflation has been running at 5 percent or more since May, as prices have been pushed higher by coronavirus-related supply chain disruptions. But investors have been increasingly unsettled by signs of inflation broadening across several sectors, potentially weakening support for the Fed’s view of the price pressures as “transitory”.
The 10-year break-even inflation rate — a market measure of expected US inflation a decade from now — rose to 2.76 percent on Friday, its highest level since 2006. The five-year break-even rate, measuring the pace of inflation in five years, rose to 3.18 percent, the highest level since 2002, according to Bloomberg.
Also adding to investor concerns, US consumer sentiment has weakened to its lowest level in a decade, reflecting Americans’ concerns about rising prices and a belief the Biden administration has failed to address the surge in inflation. The University of Michigan’s consumer sentiment index slipped to 66.8 in November, according to a survey published on Friday. That was down from 71.7 in October and well below economists’ forecast for a stronger reading of 72.4.
The decline in sentiment reflected increasing concerns about the escalating inflation rate and a growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.
On commodity markets, oil prices weakened for a third week with Brent Crude futures falling 0.4 percent to US$81.95 a barrel, while gold surged 2.5 percent to a five month high of US$1864 an ounce, its best week since May, as rising inflation had investors flocking back to the recently out-of-favour precious metal.
Bitcoin gained 2.2 percent for the week to US$64,700 after hitting a new all-time high of US$69,000 last week. The NZ dollar weakened on the back of a strengthening US dollar closing at 70.44 US cents.
WEEK IN REVIEW
Pushpay Holdings shares fell sharply after it announced a first-half result that fell well short of expectations. The faith-based software company’s revenue climbed just 9 percent to US$93.5 million in the six months ended Sept 30 and below analysts’ forecast for revenues of more than US$100m. Net profit increased US$5.7 million to US$19.1 million, up 43 percent, while underlying earnings rose to US$29.6m which was below analysts’ target of US$30m. The company also noted that growth in two key areas had been below previous estimates.
Fonterra is proceeding with a shareholder vote on proposed changes to its capital structure, with the revamped proposal retaining a version of the Fonterra Shareholders’ Fund. Voting will open November 18 and a special meeting will be held immediately after its annual general meeting on December 9. The dairy giant began consultation about the proposal in May when it warned New Zealand’s future milk supply is likely to decline or be flat at best. It said the co-op’s future financial sustainability relied heavily on its ability to maintain a sustainable NZ milk supply and protect farmer ownership and control.
Kathmandu said its store sales have been significantly impacted by ongoing Covid restrictions in Australia and New Zealand and as a result its first quarter operating profit is likely to be down approximately $35 million on the same quarter last year. It said lockdowns in New South Wales, Victoria, the Australian Capital Territory and New Zealand were more severe than in the first quarter last year and were without any direct government subsidies recognised so far.
Bank of New Zealand reported a 74 percent lift in its annual net profit, attributing the improvement to a bounce back in the NZ economy and, like most of its competitors, the write-back of Covid provisions and one-off profits. The bank, which is owned by National Australia Bank, reported a $1.32 billion net profit for the year ended September compared with $762 million the previous year. The bank wrote back a total of $37m of charges against profit for bad debts compared with last year’s $300m charge while gains on financial instruments rose to $277m from $88m the previous year. NAB itself reported a A$6.36b annual net profit, up from A$2.56b the previous year.
Weta Digital’s technology unit has been sold to US-based Unity Software, which operates under the business name United Technologies, for US$1.63 billion (NZ$2.28b). Unity, a platform for creating and operating interactive, real-time 3D content said it has entered into an agreement to acquire Weta Digital’s tools, pipeline, technology and engineering talent. Unity will pay US$1 billion in cash and the rest in stock.
TradeMe is believed to be considering relisting on both the NZX and ASX according to media speculation in Australia. The online marketplace company had previously been listed on the NZX until it was sold to private equity business Apax for $2.5 billion in 2018. Since then it has been expanding its offering making a cornerstone investment in online share trading platform Sharesies, car-repair start-up My Auto Shop and buying real estate website homes.co.nz. However, competition from Facebook’s Marketplace is likely to have impacted the company’s future growth prospects.
Xero grew its subscriber numbers by 23 percent and lifted its gross margin but it returned to reporting a bottom-line loss in the first half of the year. The cloud-based accounting software company reported a net loss of $5.9 million in the six months ended September, a turnaround from the previous first-half’s $34.5m net profit. Xero blamed the result on the impact of Covid and associated costs. Pre-tax earnings also fell by 19 percent to $98.1m from $120.8m in the previous first-half.
2degrees reported revenue for the quarter ended Sept 3 of US$127 million (NZ$179.7m), up 8 percent from US$117m the year prior. The company said its 5G launch would now be delayed until early next year. The telco is currently in talks to merge with Orcon Group having earlier been in the process of listing on the NZX.
Goodman Property Trust reported a $570m pre-tax profit for the half year to September 2021 largely due to gains in the value of its investment property portfolio. Valuation gains of $504.7m took the trust’s total investment portfolio to $4.33 billion, which includes 11 existing industrial properties and active developments across a further 10 projects. The result was a significant lift on the $184.4m reported for the comparable half-year in 2020. The company announced a second quarter, cash distribution of 1.375 cents per unit, equivalent to $19.2m, to be distributed to unitholders on Dec 16.
Mainfreight’s half-year earnings comfortably beat expectations with revenue up 41 percent from last year at $2.2 billion and net profit up almost 80 percent at $130.8 million. The result saw Mainfreight shares rebound to almost $95 after trading as low as $87 ahead of the result, though they finished the week at $90.65, up 1 percent for the week. Mainfreight said trading in the second half of the financial year had recorded the same higher volumes and earnings and it expected this to continue well into next year. Mainfreight said that in light of current trends, it would provide a nine-month trading update mid-February 2022 ahead of its full year result in May.
Infratil reported a record first-half net profit of $1.08 billion, due mainly to the profit from the sale of its stake in Tilt Renewables earlier in the year. However, the company slightly reduced its guidance for its full-year operating profit to between $500m and $530m, down from its previous $505m to $550 forecast. Chief executive Jason Boyes said the overall result “showed the business performing strongly and demonstrating resilience despite the ongoing challenges posed by the Covid pandemic”.
The BNZ-BusinessNZ Performance of Manufacturing Index (PMI) continued to expand in October, coming in at a seasonally adjusted 54.3, up 2.7 points from September after slumping in August to 39.7. BNZ economist Doug Steel said that even though October’s reading is above average it reflected more of a recovery from a large hit rather than an indication of outright strength. The PMI production index lifted to 54.0 in October.
COMING UP THIS WEEK
- Chatham Rock Phosphate AGM
- Household Inflation Expectations – RBNZ
- Napier Port Full Year Result
- Foley Wines AGM
- A2 Milk AGM
- Business Price Indexes (Sept Qtr) – RBNZ
- Vehicle Registrations (Oct)
- Sanford Full Year Result
- Savor AGM
- Survey of Expectations – RBNZ
- AFT Pharmaceuticals Half Year Result
- Savor Half Year Result
- Turners Automotive Half Year Result
- Ryman Healthcare Half Year Result
- My Food Bag Half Year Result
- Just Life Group AGM
- National Accounts (y/e March)
- Credit Card Spending (Oct)