Global markets were mixed overnight, with the story in the US continuing an inversion of the yield curve (where 10-year US government debt has a lower yield than short-term notes) implying that the bond markets believe there will be a US recession. While this is not a guaranteed indicator, with ongoing trade wars investors have clearly become more cautious in May.
Closer to home, New Zealand's Treasury acknowledged the trade tensions between the US and China in its budget forecasts as a threat to the domestic economy if the dispute slows growth in this country's major trading partners. The New Zealand dollar rose a little after the Labour-led government’s “wellbeing” budget forecast fiscal surpluses will be smaller as spending ramps up (we think there are risks here that the government goes into deficit with a potentially slowing NZ economy). The Government has committed to higher spending over the next four years with the big winners including child wellbeing, mental health, sustainable land use and climate change.
Stock in Focus: Costa Group (CGC:ASX)
Costa Group shares tumbled -27% yesterday as the former market darling provided updated guidance at its AGM.
Costa downgraded its net profit after tax expectations to between $57 million and $66 million from its previous guidance of $73.6 million following a series of unfortunate events. The fruit & vegetables producer cited a season of bad quality fruit, low prices and issues with fruit fly as the reasons behind the downgrade, but said that market conditions look to be normalising now.
The trading environment through March and April was generally favourable with an improved outlook for a number of Costa’s categories including tomatoes, avocados, and berries. The prospects for the forthcoming citrus season are also good. However, the mushroom category has had to contend with lower pricing levels due to extended summer temperatures affecting short term demand and the company has had issues in Morocco which have led to delayed fruit maturity and increasing competitive pressures on pricing. Furthermore, earlier this month the Driscoll’s grower network started to see high waste in the major raspberry variety from a condition called ‘crumbly fruit’. And finally, last week a female fruit fly was found during a routine trapping at the Impi farm at Stuart’s Point which means authorities are now implementing a 15-kilometre exclusion zone.
While clearly not a pleasing update, as with earlier this year we believe the latest announcement once again highlights the cyclical risks faced by the agriculture industry – but continue to maintain a positive medium-term view as nothing fundamentally has changed regarding the Costa investment thesis, given the multi-year demand backdrop for food globally as well as being attractive to health conscience consumers.
We currently have a BUY recommendation on Costa Group
Members should look out for a full update on Costa to be released in next week’s weekly report.
Australia & New Zealand Market Movers
The Australian share market sold off on Thursday (ASX 200 index -0.74%) as the heightened risk of a US recession sparked another sell-off on Wall Street and the local market. In stock news, Mirvac Group shares were lower following the successful completion of its $750 million institutional placement on Wednesday. The proceeds from the capital raising are expected to fund the company's acquisition and development pipeline.
The New Zealand market continued to retrace yesterday (NZX 50 index -0.24%) in subdued trading as fears over global growth weighed on firms with international operations such as Tourism Holdings and Vista Group International. Fonterra shares fell to a record low as the dairy company reported a sharp decline in milk collection in April due to the dry weather conditions. At yesterday's close, Fonterra's market capitalisation is down to $6.37 billion.
3 Things Markets Will be Watching this Week
- Mini reporting season across Australasia sees a number of Aussie & Kiwi stocks make earnings announcements this week.
- The latest US economic growth figures (GDP) are released on Friday morning (AU/NZ time).
- The NZ government budget is released on Thursday.
Have a Great Day,
