Global markets were lower overnight, setting the stage for a weak start to the month today for local markets. Both the Australian and New Zealand markets made gains in May, with the ASX and NZX market indices up +0.5% and +2.5% respectively for the month.
Shares on Wall Street closed lower with industrials pacing the decline with a decision by President Trump to impose tariffs on steel and aluminium imports from three of America's biggest allies – Canada, the EU and Mexico from June 1. The news comes after months of uncertainty about potential exemptions and has reignited fears of a global trade war, triggering retaliation plans by the EU and Mexico,
As we have discussed in the past, a global trade war is generally seen as a large risk to the global economy, and we also believe the tariffs are likely to increase inflationary pressure in the US. We are watching inflation closely as it is key to driving the pace interest rate hike decisions by the US Federal Reserve this year. US inflation is back at the Federal Reserve's 2% target after spending most of the last six years below it.
Stock in Focus: James Hardie (JHX:AX)
Construction company James Hardie (JHX) saw its shares initially react positively to a sound 2018 full year result. The result was driven by a strong turnaround in the North American Fibre cement business in the second half, which struggled with capacity constraints in the first half of the year.
JHX reported group sales of US$2,055m and adjusted operating earnings (EBIT) of US$397.5m, which were both up +7% and +12% respectively. The International division remained a strong performer driven by strong volume growth in Australia and the Philippines. The acquisition of Fermacell is also interesting as it allows JHX to gain a meaningful exposure into the affluent European market and diversify JHX’s income streams.
We have been supporters of JHX given its exposure to the US housing market recovery, which we see as a multi-year theme. Further, given JHX’s offshore earnings, we believe continued weakness in the Aussie dollar will be a medium-term tailwind for the stock.
We currently have a BUY recommendation on JHX.
Australia & New Zealand Market Movers
The Australian share market was higher on Thursday (ASX 200 index +0.45%) finished higher after energy stocks rallied on stronger oil prices and local retailers gained on news Amazon will block Australian consumers from buying products from its overseas sites. The market ended up experiencing a +0.5% gain for the month as earlier in May the index came within half a point of a 10-year closing high before it fell on losses from index heavyweights in the latter part of the month. High flying tech stock WiseTech Global continued to rally yesterday as an aggressive approach to acquisitions has helped it rise in the past few weeks and after it upgraded its revenue growth forecasts earlier this month by $3 million.
The New Zealand market was in positive territory again yesterday (NZX 50 index +0.13%) with heavy trading as several stocks entered MSCI indices. New MSCI entrant Synlait Milk lead gains alongside Mercury, while A2 Milk fell. The semi-annual review of the MSCI Equity Indexes was implemented yesterday, which saw A2 Milk included in the MSCI Global Standard Index, exiting the MSCI Global Small Cap Index, and Mercury leaving the standard index to join the small cap, an index which Restaurant Brands New Zealand, Synlait and Tourism Holdings also joined. Investors and funds (such as ETFs) who follow the indices are required to hold a certain amount of the stock, with changes causing selling and buying in new or departing stocks. In stock news, Restaurant Brands dipped as the fast-food operator announced it had lifted first-quarter sales 12% to $180 million after it acquired a further 13 KFC stores in Australia, and also shed rights to an 18 cent per share dividend.
3 Things Markets Will be Watching this Week
1. Geopolitics will likely remain a focus for investors – with trade talks between the US & China, and the between the US, Canada, and Mexico continuing.
2. The Reserve Bank of New Zealand releases its latest financial stability report on Wednesday.
3. Important US inflation data and monthly employment figures are published at the end of the week.
Have a Great Day,
Team
