Global markets continued their rout overnight, with the US markets now back at lows touched in October, having now wiped gains for the 2018 year. Weak earnings from retailers including Target and Kohl’s as well as a fall in energy shares added to worries for Wall Street overnight.
As we have discussed previously, there hasn’t been a clear catalyst but a number of risks causing investors to remain on the defensive – including an escalation of the trade war between the US and China and a monetary policy mistake/sharply higher US interest rates. There are also political distractions in Europe and with Brexit.
We are likely entering the late stages of what has been a long bull market. We reiterate that it is important for medium-term investors to remain calm during periods of heightened volatility. While we do believe there will be buying opportunities across Australia & NZ once the dust settles, investors who wish to protect against downside moves may want to build cash positions.
Stock in Focus: A2 Milk (:NZ / A2M:AX)
A2 Milk announced its net profit for the first four months of the financial year jumped 64.5% to $NZ86 million from the year-earlier period. Despite its shares opening the session 7% higher, they slipped throughout the day.
We were encouraged by the announcement, particularly as we reinstated our buy rating on A2 earlier in October as we saw the shares as over-sold.
Looking at some of the other detail, the milk marketing firm said revenue climbed 41% in the first four months of the June 2019 financial year. The company did also say that the improved profits that it was seeing – via a higher gross margin – would be offset by currency movements and increased marketing spend in the second half of the year to support expansion in China and the US.
We currently have a BUY rating on A2.
Australia & New Zealand Market Movers
The Australian share market followed global moves lower (ASX 200 index -0.38%) with tech stocks among the worst performers, tracking sentiment on Wall Street. Global growth concerns are particularly affecting tech stocks – but the concerns are spreading and higher growth, higher valuation sectors like healthcare are also under pressure. Among the local tech shares to get hit were Altium, Xero, Afterpay Touch, Appen, and Wisetech. Healthcare stocks also slipped, led by CSL which fell following a large sale by one of its biggest shareholders.
The New Zealand market was in the red again yesterday (NZX 50 index -0.83%) as growth stocks continue to get hit hard. The big news was Fletcher Building, which slumped to a nine-year low after the country's biggest listed construction firm warned of weaker profits. Fletcher’s said first-half operating earnings will be 10% lower than last year on the back of a weak Australian residential property market. Its shares fell 11% to the lowest level since the depths of the GFC in 2009. While this was not an unknown risk, we are surprised by the level of downside revisions.
3 Things Markets Will be Watching this Week
1. Trade relations between China and the US ahead of the G20 talks later this month.
2. UK politics and whether Theresa May will face a vote of no confidence and then, what happens if she loses.
3. Minutes from the last reserve Bank of Australia meeting are released on Tuesday.
Have a Great Day