New Zealand Budget
Today’s Budget demonstrated a necessary degree of financial restraint and did not offer significant perks to the average household. It remains to be seen if this fiscal discipline will continue until the election date. One key concern is whether the Government has exercised appropriate prudence to avoid a downgrade by rating agencies. S&P, a rating agency, has shown a strong interest in the Budget’s contents before making any decisions about our country’s current rating of AA+ (foreign currency) with a stable outlook.
Looking ahead to the upcoming decision by the Reserve Bank of New Zealand (RBNZ) next week, the Budget did not contain any unpleasant surprises that should cause excessive worry.
The fiscal stimulus is expected to be contractionary in the next few years, and government spending has actually been slightly reduced (except for the year 2024). The most likely outcome at the RBNZ’s meeting next Wednesday is a 25 basis point interest rate hike, although there is still a decent possibility of a more substantial 50 basis point increase.
Bottom line here is “nothing to see” – we would’ve liked to see a bolder move from Robertson (shifting income required for tax brackets, for instance).
Stock in Focus: Xero Limited (XRO.ASX)
Xero shares jumped +8.9% after delivering another strong set of numbers for their 2023 financial year. Operating revenue rose +28% from last year to $1.4 billion, on the back of +14% subscriber growth (+470,000 new subscribers) and average revenue per user rising +10% showing the strength of the product. The price increase helped offset cost increase and bucking the trend for most businesses Xero’s gross margins held – which is one of the highlights. Another is operating expenditure as a percentage of revenue came in better than expected at 80.7%, and is expected to fall down to 75% in 2024 improving the earnings outlook.
We rate Xero as a quality tech company, with plenty of growth potential over the medium to long term, albeit with some slow-down in growth levels over the near-term. Despite being sold off so heavily over the year, there is still a risk of further downward pressure over the near-term so this would create further buying opportunities for long-term investors, while we are BUY (High Risk) rated we still warn investors to still be cautious over the next 6 months.
We believe Xero is still great business, with nothing fundamentally changing our view on the company long-term. Looking ahead, we believe strong growth potential over the long-term given the market opportunity to meet total addressable market (TAM) for cloud-based accounting software to be ~45bn, with 20% adoption so far with plenty of growth ahead.
Stock in Focus: Aristocrat Leisure (ALL.ASX)
Aristocrat on the other hand did not fare as well, falling -3.1% yesterday after revealing a sound result for the first half of the 2023 financial year, the result assisted by favorable forex and interest income. Aristocrat’s revenue growth of 12% (5% in constant currency) was driven by a strong performance from its North America gaming operations and global outright sales, as well as a resilient performance from Pixel United in a challenging environment.
We still view Aristocrat favourably, and while near term growth could be subdue, it is still well placed in the gaming sector and reasonably priced compared to many tech companies with strong cash reserves to make value add acquisitions. For that reason, we remain Buy (High Risk) rated, however investors should be patient picking up shares on further weakness over near-term (6months).
US
The first $9B you lose is the hardest
Last year we watched a good HBO documentary about Carl Icahn which showed him with a messy desk and a lot of phones: we liked him immediately. There’s few of the “old school” ‘confessions of a stock market operator’ guys around anymore – Icahn is the last of a dying breed. Today Icahn admitted he lost +$9B on a series of ill-fated bets that the market would go down. He has been short (via a series of hedges) since 2017. This is sort of the worst trade you could’ve made – we had COVID and the related stimulus, and revenge spending, and everything else – the net result was that Icachn lost $9 billion dollars; $4.3B or so was lost between 2020 and 2021 while another $4 billion dollars of Icahn’s own money was plowed into his company to keep it afloat. This is sort of What Not To Do When Trading 101: don’t put your entire book into one bet, or as Kenyes said, the market can stay irrational longer than you can stay solvent. The problem is not that Icahn was wrong, it’s that his timing was off and he kept averaging down (another great quote: losers average losers). Soros did the same during the tech boom – he bet against tech in 2000. He wasn’t wrong; the market crashed eventually. He was just early.
It’s sort of endemic of where the market is at, though – markets only go up. This isn’t true, of course; they crash, but lately the S&P seems like it’s in a kind of never-never land of suspended animation. Some of this is because results have actually been quite good, though it’s worth thinking about how disparate those returns are – Microsoft and Apple have added nearly one trillion in market value this year alone, accounting for +40% of the S&P 500’s returns. It’s a bad time to go short.
Chart of interest: US bankruptcy filings
