Global markets were lower overnight, as worries of a global economic slowdown remain at the forefront of investors’ minds.
Interest rates continue to move lower, as US treasury 10-year yields fell to the lowest since December 2017, and rates on benchmark German bunds sank further below zero after European Central Bank President Mario Draghi said an accommodative stance is still needed
Closer to home, The Reserve Bank of New Zealand kept the official cash rate on hold at 1.75 percent but changed its language to say it now expects to cut rates. The kiwi dollar tumbled more than 1 US cent. "Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down" governor Adrian Orr said.
The news saw the NZX surge to a new record high. Lower interest rates are a boost for equities, raising the attraction of companies offering stable dividends and providing easier credit for business, as well as resulting in higher valuations.
Stock in Focus: Fonterra Shareholders Fund (FSF:NZX / FSF:ASX)
Shares in dairy giant FSF have fallen to all-time lows after cutting its forecast earnings and announcing it won’t be paying an interim dividend, a month before reporting their 2019 interim result. Fonterra managed to deliver a net profit for the 2019 interim result of $80m, compared to a reported loss of $348m in the previous year. Unfortunately, normalised earnings (EBIT) were down -29% from last year to $323m despite a steady performance from New Zealand ingredients, which was offset by challenges in Australia, negatively impacting margins.
While sales volumes were up +2% from last year to 10.7 billion LME, revenue fell -1% from last year down to $9.7 billion due to lower overall pricing. Fonterra were also plagued with weaker margins across most business divisions and locations which didn’t help the bottom line. On a positive note, Fonterra remain on track with its goal to reduce debt by $800m by the end of the year as it continues to review its portfolio, selling non-core businesses. The review should help strengthen its balance sheet. reducing debt and allowing the co-operative to focus on its core business – albeit shareholders would have to be patient as the potential turnaround won’t happen overnight.
Fonterra has failed to deliver on its promised “value-add” strategy to date. We recently removed FSF from our model portfolio as without the ability to execute on their strategy effectively, we do not believe they will be able to deliver a meaningful return to shareholders (adding to the inherent issues with the company’s structure). We will watch how its portfolio review & potential restructure plays out, as these changes will likely take a long time to implement and we are in no rush to buy back into FSF.
We currently have a HOLD recommendation on FSF.
Australia & New Zealand Market Movers
The Australian share market was a touch higher on Wednesday (ASX 200 index +0.09%) for a second day in a row. Tech stocks led gains, with Afterpay Touch, Wisetech Global, & Xero all up, while utilities led declines. Lynas Corp and Wesfarmers both rose after the rare earth mineral miner rejected the conglomerate's $1.5 billion, $2.25-a-share unsolicited takeover offer. There was no indication what Wesfarmers' next move might be. A spokeswoman said the company would be responding "in due course".
The New Zealand market rallied yesterday (NZX 50 index +1.30%) New Zealand shares got an unexpected boost after the Reserve Bank's warning that it may cut interest rates stoked demand for companies with stable dividends. Meridian led the market higher, while Spark New Zealand also made strong gains and Auckland Airport hit a fresh record high. In stock news, Mercury shares gained after announcing plans to start construction on a $256 million wind-farm from August – the project is expected to eventually deliver an extra $30 million a year to Mercury's earnings, and its construction will be funded by debt.
3 Things Markets Will be Watching this Week
- Signals around the health of the global economy will remain a focus for investors.
- US economic growth (GDP) figures are published Thursday night (AU/NZ time).
- The Reserve Bank of NZ makes an interest rate decision on Wednesday.
Have a Great Day,
Team