Global markets were slightly higher overnight as investor optimism cooled after the initial news that President Donald Trump may finally be making headway on long-promised tax cuts. As we mentioned yesterday, such large tax reform will clearly be a massive stimulus for businesses and the US stock market, and we will be watching developments as they unfold closely.
Yesterday saw acting Reserve Bank of NZ governor Grant Spencer kept the official cash rate unchanged at 1.75% as widely expected, and signalled no change on the immediate horizon. As we have discussed previously we believe that both the RBA and RBNZ will keep interest rates unchanged for the foreseeable future. This is key to our forecast for a higher US dollar and lower AUD & NZD (all else equal a higher interest rate drives demand for a currency and results in currency strength).
At the same, time, we believe the market is underestimating the pace of rate hikes by the US Federal Reserve, which should result in US dollar strength. The Fed is likely to raise interest rates in December, and is beginning to unwind its massive balance sheet and stimulatory measures. Given our currency views, one of our core investment themes remains investing in stocks which will benefit from a lower currency. These include offshore earners, exporters and stocks in currency sensitive sectors such as Tourism.
Stock in Focus: Synlait Milk (SML.NZ / SM1.AX)
Shares in Synlait Milk surged another 6% yesterday as the milk processor made a joint announcement with its infant formula partner a2 Milk confirming that their brands and recipes have gained registration in China, removing an obstacle in a market with soaring sales.
Synlait said it has gained manufacturer registration for a2 Milk's Chinese label infant formula, meaning the products will continue to have market access in 2018 when China tightens its rules. From Jan. 1, 2018, all manufacturers of infant formula are required to register brands and recipes with the China Food and Drug Administration (CFDA) to sell into the Chinese market through traditional channels. The registration is part of broader efforts by China to lift food safety standards after a number of scares including the death of infants from ingesting infant formula laced with melamine in 2008.
“We view this registration as another milestone in our long-term partnership with a2 Milk," said Synlait chief executive John Penno said in a statement. "Having successfully navigated the process, in conjunction with a2 Milk, we are now in a stronger position for future applications of other Synlait customers," he said.
This was another positive announcement for A2 Milk and Synalit, and we continue to be impressed by A2 management and their agility and execution in dealing with Chinese regulatory issues.
We have a HOLD rating on A2 Milk, and currently do not have full research coverage on Synlait Milk.
Australia & New Zealand Market Movers
The Australian share market was slightly higher yesterday (ASX 200 index +0.11%) while a surge in the US dollar has helped push the Aussie dollar to its lowest level in more than two months. Gains in the health, utilities and financial sectors offsetting another slide in iron ore prices that hit the miners.
The New Zealand market was flat on Thursday (NZX 50 index +0.00%) as Synlait Milk and A2 Milk Co broke new records on regulatory approval to retain Chinese market access, while Z Energy dropped after missing heightened expectations on its bigger dividend policy. In other news, shares in scented candle and skincare product company Trilogy dropped -10% as it said it forecasts a drop in operating earnings.
3 Things Markets Will be Watching this Week
1. The Reserve Bank of New Zealand makes an interest rate decision on Thursday.
2. The Geopolitical situation as tensions between the US and North Korea remain very high.
3. NZ politics and negotiations as a coalition government is formed, as well as the outcome from the German election.
Have a Great Day,
Team
