Pound Craters| Costa Group 

27 September 2022

US markets (S&P 500 Index -0.8%) fell on Monday to reach their lowest close this year. The S&P 500 is now approximately 24% off its 2022 peak. Rate hikes, bond yields, inflation, and now a strengthening USD (+0.9%) is contributing to the rout in stocks, as US multinationals become less competitive in the global market. 

All sectors closed in the red, except Consumer Staples (0.0%) which was flat for the day. 

European markets (Stoxx 600 Index, -1.8%) ended lower after a choppy Monday as the economic outlook for the region continues to weigh on investors. 

On the currency front, the big news is the pound (-1.8%) hitting record low levels against the US dollar. The pound is currently trading at $1.07, a dramatic fall from Friday’s level at $1.12. The sharp currency sell-off is being blamed on markets losing confidence in the UK economy and the new tax cuts introduced by the Liz Truss led government. 

Similarly, the UK 10-year bonds (+0.42%) have experienced a huge sell-off, driving up the yield to 4.25%. The Bank of England released a statement in response to the sharp sell-off, noting that it was watching the situation closely but did not commit to raising rates until its next policy meeting in November. 

Costa Group (CGC:ASX) 

Costa Group (-14.2%) experienced a big fall on Monday after the company announced that its CEO and Managing Director Sean Hallahan will be stepping down after only 18 months into the job. Australia’s biggest fruit and vegetable supplier will be helmed by Former Costa boss Harry Debney in the interim. 

The news will raise questions from the market, particularly given Sean was COO for 4yrs prior to becoming CEO. The above said, Harry Debney is well regarded, knows the CGC business well and is known to the market. We expect limited disruption in the transition, but do believe finding a CEO will be challenging given the complexity of the business, global operations and relative size. We continue to see CGC as a global leader in agriculture and well placed to accelerate cash-flow over the coming years, however see few immediate catalysts until clarity on a new CEO is gained. 

CGC shares are now trading at their lowest level in 6 years in response to this latest development combined with its weak interim profit report from August and labour shortage issue from May that sent the stock down 5% and 24%, respectively, during those events. 

Taking a medium-term view, we remain BUY (but with a high-risk caveat) as Costa provides attractive upside potential and we still believe the company should be able to recover from here on out. We think there will be room to grow earnings and expand margins on the back of increased planting efforts and planned expansion, with any setbacks likely to be transitory and not widespread across most categories, as opposed to structural and more worrying concerns. 

Australian & New Zealand Market Movers 

The Australian market (ASX 200 Index, -1.6%) continued its slide on Monday to its lowest point in three months. The biggest market losers were coal producers including New Hope (-14.7%), Whitehaven Coal (-14.0%), with the Energy (-6.3%) sector as a whole performing incredibly poorly. 

The Australian dollar (-1.4%) fell below $0.65 against the US dollar for the first time in more than 2+ years. 

The New Zealand market (NZX 50 Index, 0.0%) was closed on Monday. The stock market closure did nothing to stop the New Zealand dollar (-2.0%) falling further to $0.56. 

What Markets will be Watching this Week (UTC –4) 
 
Monday 

Germany Ifo Business Climate (SEP) 

Tuesday 
US Durable Goods Orders MoM (AUG) 

US New Home Sales (AUG) 
 
Wednesday 
Germany Consumer Confidence 

NZ Business Confidence (SEP) 
 
Thursday 
Germany Inflation YoY (SEP) 

China Caixin Manufacturing PMI (SEP) 

 
Friday 
Japan Consumer confidence (SEP) 

Euro Area Inflation Rate YoY Flash (SEP) 

US markets (S&P 500 Index -0.8%) fell on Monday to reach their lowest close this year. The S&P 500 is now approximately 24% off its 2022 peak. Rate hikes, bond yields, inflation, and now a strengthening USD (+0.9%) is contributing to the rout in stocks, as US multinationals become less competitive in the global market. 

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