Global markets were higher on Friday (S&P 500 index +0.8%) as US stocks reached new highs on the back of strong data. Investors shrugged off inflation concerns and focused on the economic recovery although volume on US exchanges hit a new low for the year.
There wasn’t any major news to drive markets on Friday, but sentiment remains broadly upbeat. Interestingly, markets brushed off news that Europe’s drug regulator had opened an investigation into Johnson & Johnson’s vaccine, after four serious cases of blood clotting.
Looking ahead, the US corporate earnings season kicks off properly this week with the major US banks reporting quarterly profits. During earnings season the focus of investors usually shifts away from economic issues and back towards company specific numbers. For the S&P500, the consensus is for earnings growth of 25% in 1st quarter from a year ago given the extraordinary impact of COVID. The Financials sector is expected to be one of the top performers with banks expected to continue writing back loan loss provisions they made last year.
Contact Energy (CEN:NZX / CEN:ASX)'
The NZ gentailer sector has been distorted in recent months by large investment flows from the IShares Clean Energy Index. S&P index changes for implementation on Friday 16th April remain and our view is to be to be long post 16th April.
In terms of the detail, the index has looking to change its methodology from 30 stocks to 67 – 100 stocks, which we expect to see selling in Contact Energy for 72m shares (9% of free-float) & Meridian Energy 100m shares (8% free-float).
Overall, we are neutral on the sector. Whilst its defensive characteristics are attractive, bond rates have been moving higher which is negative, and we see increasing regulatory/political risk.
That said, our preferred pick, CEN, is attractive. It is trading on undemanding multiples (p/e ratio 18x, cash yield 5.2%) with a healthy and growing gross dividend yield of 6.5%. CEN is also likely heading into an earnings upgrade cycle on sustained wholesale price increases supported by declining gas deliverability to thermal generators, material increases in carbon prices and demand firmed by a four-year Tiwai smelter low-priced contract extension agreed in January.
We see a great opportunity for investors to BUY Contact shares this week and will release a full initiation of coverage report for members in our weekly report.