Fed Hikes Rates |Air New Zealand Update

27 September 2018

Global markets were mostly lower overnight as the US Federal Reserve (Fed) raised interest rates by a quarter of a percentage point to a range of 2.00 percent to 2.25 percent.

The Fed stayed on course with its plans to steadily tighten monetary policy, as it forecast that the US economy would enjoy at least three more years of growth. We saw no real surprises from the Fed statement, although it did remove the reference to ‘accommodative’ policy, marking the end of an era. Fed Chairman Jerome Powell said the removal of the wording, which had been a staple of the central bank’s guidance for financial markets and households for much of the past decade, did not signal a policy outlook change. In terms of outlook, the US central bank still foresees another rate hike in December, three more next year, and one increase in 2020 amid steady economic growth and a strong job market. 

We continue to watch moves by the Fed closely given the importance of US interest rates for global markets. As we have discussed in the past, the pace of rate hikes is a factor that will likely drive markets at the current juncture, given higher rates are generally negative for stocks as they tighten/slow down the economy and weigh on company valuations.


Stock in Focus: Air New Zealand (AIR:NZ / AIZ:AX)
As we touched on yesterday, the price of oil is near 4-year highs, and rising oil prices kept investors nervous about higher energy costs for companies yesterday, and was identified as a headwind for Air New Zealand at its annual meeting.

In terms of recent updates, Air NZ released another solid result for their 2018 financial year with robust demand across all markets, driving revenue growth up +7.4% from last year. However, this was partially offset by a +19% increase in total fuel expense. Despite fuel prices remaining high, management remain positive that demand will continue to remain strong although taking into account an average jet fuel price of US$85 per barrel for 2019, they expect underlying earnings before tax to be in the range of $425m to $525m. This excludes an estimated $30m to $40m impact from scheduled changes/reductions prompted by global Rolls-Royce engine issues – hopefully this is only a near term and one-off issue

We still believe Air NZ is reasonably priced on a relatively low PE multiple and offers an attractive 6.5% dividend yield (assuming a small dividend, and clearly fits well with our tourism boom investment thematic. However, we caution that investors need to have an appetite for risk considering the factors outside of AIR’s control such as the price of jet fuel.

We currently have a BUY (High-Risk) recommendation on Air NZ


Australia & New Zealand Market Movers

The Australian share market was a touch higher on Wednesday (ASX 200 index +0.10%) as expectations there will be an interest rate rise in the US weighed on local banking shares, offsetting gains from energy and materials stocks. The financial sector continued to trade lower ahead of the royal commission's interim report and Commonwealth Bank led the market losses.

The New Zealand market was slightly higher yesterday (NZX 50 index +0.04%) as gains in Fletcher Building led the market higher. Rate-sensitive power companies and property investors were generally lower after a recovery in business confidence reduced the prospect of a rate cut in the coming year. Outside the benchmark index, NZME fell after the Court of Appeal released its full judgment upholding earlier rulings blocking a planned media merger with Stuff.


3 Things Markets Will be Watching this Week

1.             Trade related news-flow is likely to continue to feature in headlines.

2.             The US Federal Reserve makes an interest rate decision Thursday morning AU/NZ time.

3.             The Reserve Bank of New Zealand also makes a monetary policy statement on Thursday morning.  


Have a Great Day

Global markets were mostly lower overnight as the US Federal Reserve (Fed) raised interest rates by a quarter of a percentage point to a range of 2.00 percent to 2.25 percent

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