RBNZ Gets Hawkish | Delegat Update

15 July 2021

Global stocks were mixed overnight, with the US market (S&P 500 index -0.1%) eking out a small gain after Federal Reserve Chairman Jerome Powell remained committed to easy monetary policy. Powell said the Fed can wait before it starts to ease its bond purchases until further substantial progress is made and believes they are still some way off their targets, despite surging inflation readings – which they believe will remain high for the next coming months before starting to moderate. 

Big tech names got a boost from falling rates, while Apple shares rose +2.4% after asking suppliers to ramp up production for its next generation phones by +20%. It was mixed results from companies reporting – Wells Fargo was up +4% after beating profit estimates, Bank of America fell -3.2% missing expectations due to lower interest rates lowering net interest income, and American Airlines which reports next week guided its revenue will be better than anticipated and its expect to deliver a narrower loss for the second quarter.

Closer to home, RBNZ have taken a much different tone to the Fed and global central banks, announcing it will stop quantitative easing by ending its Large Scale Asset Purchase Programme from next week. 
The Committee will keep the Official Cash Rate (OCR) at 0.25% and the Funding for Lending Programme unchanged – but paved the way for an earlier than expected OCR rate hike as the risk of inflation overshooting is now a greater risk than inflation and employment "undershooting". This brings forward the likelihood of a potential rate hike as early as August as opposed to earlier prediction of  November, and accordingly the NZ dollar jumped against the USD to be back above 0.70 again. An interest rate hike this year is now fully priced and expected by the market. 

We've maintained our view that the period of record low interest rates would not be permanent and anticipate to see a pullback across some overvalued local assets (particularly residential property), and that something similar could happen overseas for assets trading on inflated valuation multiples, once their respective central banks follow the lead of the RBNZ. 

Delegat Group (DGL:NZX)

Shares in wine maker Delegat Group ( DGL) were down -4.7% yesterday experiencing a delayed response after announcing late on the Tuesday session its 2021 full year net profit would be slightly lower than initially expected. The weaker result is due to lower sales volumes and crop, compounded by shipping constraints during peak NZ export season.  

Unfortunately, the near-term outlook for Delegat’s is also challenging guiding a weaker net profit for the 2022 financial year due to tighter margins and cost inflation.

We maintain our HOLD rating on Delegat’s, largely based on its valuation. We would recommend early investors to take some profit at these elevated levels. 


Australia & New Zealand Market Movers

he Australian market was higher on Wednesday (ASX 200 index +0.3%) with most sectors rising except for tech, shrugging off concerns regarding a 2-week extension to Sydney's lockdown.

Buy now pay later stocks were hardest hit with Zip Co down -11.4% and Afterpay down -9.6% after Apple announced they planned to partner up with Goldman Sachs to launch their own buy now pay later offering "Apple Pay Later", mounting pressure on the sector as Paypal also announced its would scrape late fees on their rival offering.  

Utilities were the best performing sector reporting their best day since April last year (during the covid recovery) thanks to Spark Infrastructure leaping +7.6% amid reports of a takeover proposal, followed by Consumer staples as investors took a more defensive approach. 

Sydney Airport's board has formally rejected the $8.25 per share takeover offer, and it is rumoured the board wants to see a bid with at least a 9 handle before providing access to due diligence.

The New Zealand market fell yesterday (NZX 50 index -0.5%) reacting to RBNZ's announcement and anticipating an earlier hike in interest rates.

Selling was broad based, Delegats group experiencing the biggest fall down -4.7%, followed by Vista Group down -3%.
Property and utility stocks were hit hard as being seen as most sensitive to a rate increase, Precinct Property down -2.9%, Contact Energy down -2.5% and Investore Property slipping -2.4%.

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, with the US market (S&P 500 index -0.1%) eking out a small gain after Federal Reserve Chairman Jerome Powell remained committed to easy monetary policy.

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