Inflation Surprises | A2 Milk Investor Day

29 October 2021

Global markets were lower overnight, as the US market (S&P 500 index -0.5%) slipped from fresh highs as the current rally took a breather. 

Earnings remain in focus – McDonald’s (+2.7%) and Coca-Cola (+1.9%) climbed higher after positive results, Visa also delivered strong result but fell -6.9% due to conservative revenue guidance for 2022. Likewise, General Motor’s was down -5.4% despite the earnings and revenues coming in at the top end of guidance. Robinhood shares were slammed, down -10.4% the day after the trading app reported revenue well below expectations and weaker than expected guidance.

Most sectors were weaker as investors took profit, while technology was almost flat as gains from Microsoft (+4.2%) and Alphabet (+4.9%) due to stronger than expected results offset a broadly weaker day. The major laggard was energy stocks as WTI crude slipped -2.5%. 

European Markets (Stoxx 600 index -0.4%) were weighed down by weaker commodity prices and as investors monitor UK budget update

Closer to home, Australia CPI (inflation) data for the third quarter came in higher than expected, with a quarterly increase of +0.8% and core annual inflation +2.1%, well above the 1.8% expected and putting it back in the RBA's 2% to 3% target range for the first time in six years. The central bank had forecast core inflation would not reach 2% until mid-2023 and, in turn, that cash rates would remain at record lows of 0.1% right out to 2024. Implications saw Aussie Bonds (interest rates) rise, pricing in a an RBA hike next year well ahead of their guidance. 

The Bank of Canada also shocked the market, with an immediate end to its liquidity support (QE) program, bringing forward rate hike guidance into the “middle quarters” of next year. The change in view was driven by much higher inflation projections and with inflation above the top of the target range and expected to stay there for some time, stating “the upside risks are of greater concern”.

The implications is we are seeing other central banks now move to a more hawkish tone and that inflation is creating an issue, forcing rates to revert back to pre-covid levels sooner than some had hoped – following RBNZ’s lead.


A2 Milk (:NZX / A2M:ASX)

A2 Milk shares slumped -11.4% yesterday, following their AGM which didn’t contain the good news investors had hoped for following rivals reporting infant formula sales in China were recovering.

A2 milk stated they were starting to see some signs of improvement with brand strength still encouraging, but the daigou trade has shrunk to be just 10% of its business.

This was the major drag bringing margins under pressure which didn’t bode well with investors expecting low-to-mid-20% profit margins over the medium term, which would  only be achievable based on stronger than expected market recovery given higher expected  marketing spend, 

The recent volatility and shift in investor sentiment is the major reason for our HOLD rating at current levels. There is plenty of near-term uncertainty (particularly in China) and while there was some positive noise, we see a longer and slower 5-year recovery plan playing out than the market had anticipated.

Australia & New Zealand Market Movers

The Australian market was down yesterday (ASX 200 index -0.1%), as rate hike risk weighed on the market.

The rise in bond yields support banks stocks to trade higher. On the flipside major miners were lower  as investors readjust how valuable their dividend were for rinsing rates – despite the price of iron ore rising.

Telstra shares rose +3.2%, gaining more momentum since announcing its $1.6 billion Digicel Pacific acquisition on Monday, and after receiving a broker upgrade.

Woolworths fell -3.2% after warning inflation was building across the business and NSW sales started to slow as the economy reopened, rival Coles slipped -1% as well. 

The New Zealand market was lower on Wednesday (NZX 50 index -0.4%) in a generally weak day of trade.

A2 Milk was the major drag followed by Synlait down -3%. A Profit upgrade from Skellerup saw the stock jump +2.6%.

Move Logistics Group was unchanged at $1.62 after announcing plans to raise $40m of capital in a renounceable rights offer. PGW continues its strong rally up +4.9% yesterday after lifting its earnings guidance to $53m for the 2022, with the share sup +30% since releasing its 2021 result in August. 

3 Things Markets will be Watching this Week

  1. Key events this week include third quarter GDP print in the US and Eurozone, and CPI (inflation) releases Eurozone and Australia.
  2. 3rd quarter Earnings from Tech giants Alphabet, Microsoft, Amazon and Apple are set to report this week, along with Dow components Caterpillar, Coca-Cola, Boeing and McDonald’s.
  3. Locally, quarterly updates from ASX listed companies, AGM’s from Woolworths, Chorus, JB Hi-Fi, Star Entertainment, Challenger, Freightways, Air NZ, and SkyCity. A highly anticipated Investor Day will be held by a2 Milk on Wed while ANZ, Macquarie Group and Resmed will report earnings over the week.
Global markets were lower overnight, as the US market (S&P 500 index -0.5%) slipped from fresh highs as the current rally took a breather.

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