Inflation Running Hot | Select Harvest Jumps

14 July 2021

Global stocks were mixed overnight, (S&P 500 index -0.4%) as high inflation numbers overshadowed a sold start to US corporate earnings season.

Inflation in the US jumped +5.4% year on year (ahead of expectations of 5%), its fastest increase in 13 years, and on a monthly basis rose +0.9%. The argument that this is still transitional due to influences such as used car and truck prices jumping +10.5% over the month (+45% over the year), and other sectors particularly influenced by the shutdown like air fare, transportation, and the gasoline index up +2.5% over the month (45.1% over the year). However, Food and Energy were both up substantially up +0.8% and +1.5% respectively on a monthly basis, with Food increasing +2.4% over the year.

The higher inflation number saw interest rates rise with the 10-year US treasury bond increasing 4 basis points to 1.40%.  

PepsiCo rose +2.3% after beating its second quarter earnings and revenue, fuelled by returning restaurant demand, and provided upbeat guidance. JP Morgan (-1.5%) and Goldman Sachs (-1.2%) were weaker despite beating market expectations (but had rallied into their results) as the banks release loan losses which were previously flagged in the peak of the pandemic and now not being realised. Boeing fell -4.2%, after the plane maker cut 787 Dreamliner production following the detection of a new flaw.

European stocks were flat overnight (Stoxx 600 index, +0.0%), as European investors waited for US inflation data. Nokia (+6.6%), Nordic Semiconductor (+6.2%) and Swatch Group (+2.0%) traded higher after delivering strong results.

An interesting global fund manage survey overnight showed funds have trimmed their exposure to cyclical, value and small cap stocks and shifted into technology, growth and large-caps although fund manager positioning relative to history remains tilted toward cyclical assets, industrials and materials, as well as commodities. Exposure to cash rose to a net 12% overweight, the highest since Oct 2020. 

Select Harvest (SHV:ASX)

Select Harvest (SHV) shares soared +16% yesterday after announcing a solid business update.
This included an estimate that crop harvest for 2021 including the acquisition of the Piangil orchard will be approximately 28,250 MT, up +22% from the previous year crop volume of 23,250 MT. Market conditions have also been favourable, with strong demand across all of SHV's key markets. More influential, worsening drought conditions in California (the largest source of almonds) reduced shipment volumes from the regions led to a +5% to 10% jump over the last 6 weeks.

Despite benefiting from strong demand and drought, we prefer to avoid Select Harvest and remain HOLD rated given limited upside from here and the risk of a heavy pullback as in past is possible given Select Harvest's volatile history and sensitivity to almond production output in California.


Australia & New Zealand Market Movers

The Australian market ended Tuesday lower (ASX 200 index -0.02%) after initially starting the session strongly on the open.

Stocks sensitive to Sydney lockdown and local economic activity were weaker, with Real Estate, Energy and Banks stocks trading weaker. 
These were offset by gains in the material sector seen as immune to the Sydney lockdown and supported by strong Chinese trade data coming in ahead of consensus, which saw most miners trade higher as commodity prices across the board remain robust. 

Youfoodz shares soared +77.5% after meal kit supplier HelloFresh proposed a $125.3m takeover bid ($0.93 per share) a massive premium to its recent trading price, but well below its $1.50 listing price from its IPO in December last year.

The New Zealand market rose yesterday (NZX 50 index +0.2%).

Tourism Holding led the market higher up +3.8%, as it recovers from being heavily sold off due to the spread of covid in Australia restricting travel and pausing the Trans-tasman bubble. 
Delegat Group was unchanged yesterday despite releasing weak announcement late in the session, blaming supply chain disruptions and a smaller vintage that will weigh down on near-term earnings and tighten margins. 
My Food bag rose +3.8% following the announcement of Youfoodz (a similar business to My Food Bag) takeover as investors were encouraged by the takeover price being at a significant premium to its current price. 

3 Things Markets will be Watching this Week

  1. Key events this week include inflation prints in US, Eurozone, UK and NZ. US quarterly earnings season also gets underway. 
  2. Covid-19 related development globally, and particularly in NSW.
  3. Australian employment data and Wednesday's RBNZ meeting.
Global stocks were mixed overnight, (S&P 500 index -0.4%) as high inflation numbers overshadowed a sold start to US corporate earnings season.

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