High growth Tech stocks such as Amazon and Netflix were hit the hardest, as rising Treasury yields and trade-related worries sapped investor risk appetite. Combined with political issues in Italy, there are a few issues of concern for markets at the current juncture.
While the overnight drop was sharp, it is important to put the sell-off in context – given the US market (measured by the S& 500 index) is only down -5% from the all-time high hit at the start of October. Further, looking back at the sharp sell-off In February, investors who held through the volatility would have performed better than those that sold in panic. We think it is important investors do not panic in times of heightened volatility, although we are watching developments closely. As we discussed yesterday, we are monitoring the pace of interest rate moves higher (as a key factor for driving markets) and on this front we will be watching US inflation figures released this week.
Stock in Focus: A2 Milk (:NZ / A2M:AX)
A2 Milk shares have fallen sharply following news that chief executive Jayne Hrdlicka sold all of her shares, and soon after director Peter Hinton sold a small portion of his holdings. The sales have been negatively received by the market and were poorly communicated. However, the fall does not represent anything fundamentally concerning in terms of A2 Milk’s business, in our view.
We have always said that we had a positive view towards A2 Milk (particularly given its exposure to the growing Asian middle class consumer), but maintained our HOLD recommendation due to valuation. Now trading at a forward price to earnings multiple of 27x, we believe A2 Milk is attractively priced as a high growth stock. As such we have upgraded our recommendation, with a high-risk caveat given risks such as execution, regulation, and competition.
We have upgraded our recommendation to a BUY (High-Risk) from a HOLD.
Australia & New Zealand Market Movers
The Australian share market was slightly higher on Wednesday (ASX 200 index +0.17%) as shares stabilised after a turbulent trading session with healthcare stocks such as CSL and Cochlear rebounding. Many of the major resource stocks also closed the session higher as most base metal, iron ore and oil prices lifted overnight. In stock news, Commonwealth Bank led the Bank gains, despite news that a class action against the bank had been filed in the Federal Court, with lawyers Slater and Gordon claiming it could exceed $100 million.
The New Zealand market continued its down-ward trend yesterday (NZX 50 index -0.21%) as investors remain uncertain about the global economic outlook. As we touched on yesterday, financial markets have become more volatile as the US government bond yields have increased, putting pressure on stocks that have been trading at high valuations in particular. In stock news, Fonterra Shareholders' Fund fell as the milk processor lowered its forecast pay-out to farmers and raised its production expectations. Genesis Energy was unchanged after its annual meeting which as the last for chair Jenny Shipley. Genesis said it improved its customer churn in the first quarter and registering increased retail electricity and gas sales volumes.
3 Things Markets Will be Watching this Week
1. Trade related news-flow is likely to continue to feature in headlines.
2. In an event light week, Tuesday’s Aussie Business Confidence survey will be carefully watched for any adverse impacts from US-China trade risk and the housing slowdown.
3. Important US inflation data is published on Friday.
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