Stimulus Hopes | Fonterra Continues to Divest

8 October 2020

Global markets rebounded overnight (S&P 500 Index +1.8%) as US stocks climbed to a 3-week high on optimism over economic stimulus.

Regeneron Pharmaceuticals rallied after Trump was given an experimental antibody treatment made by the drugmaker. Albeit, Trump’s condition remains clouded by confusion, with the president’s effort to show strength contradicted by conflicting accounts from his doctors. On the US stimulus front, Trump tweeted from the hospital that a deal needs to get done. House Speaker Nancy Pelosi was optimistic that a bipartisan stimulus bill can be done, and said his diagnosis “kind of changes the dynamic”.

Markets also appear to see a greater chance of a clear Biden win in the election, reducing the risk that Trump disputes the result and creates a drawn-out period of uncertainty.

Fonterra (FSF:NZX / FSF:ASX)
Fonterra Shareholders' Fund units were unchanged yesterday as Fonterra said it would sell most of its China farms for $555 million and use the proceeds to repay debt.

This looks to be a solid outcome given the limited earnings contribution the division made in 2020 ($11m operating profit), and losses in previous years on what has been a poor investment. The divestment of non-core assets and paying down of debt continues to allow Fonterra to re-focus on adding value to its NZ milk pool.

While some of the recent transactions by Fonterra look promising, we remain HOLD rated. Due to uncertainty from covid-19 which was reflected in a wide outlook guidance range from management, we would prefer to remain on the side-lines. We would like to see some certainty regarding Fonterra’s operating performance through covid-19 with trading conditions overseas likely to remain challenging.


Australia & New Zealand Market Movers

The Australian market rallied on Monday (ASX 200 Index +2.6%) in its best session in three months with all major sectors such as banks, mining, and healthcare strongly in the green.

The Federal government announced it would pay out a further A$1.2 billion to subsidise the wages of apprentices. The new money means a total of A$5 billion has been allocated to skills training since the outbreak.

Investors are hopeful the federal budget due today will deliver needed stimulus to help power the domestic economy. Media reports are that the budget will include a wave of spending to boost the economic recovery, with expectations income tax cuts are set to be brought forward and backdated.
In stock news, Woolworths has completed the merger of the ALH pubs business and its Endeavour Drinks liquor division, and a spin-off is now expected to happen next year.

The New Zealand market was higher yesterday (NZX 50 Index +0.6%) as tourism related stocks remained in favour. Air New Zealand extended its Friday rally after the Australian government announced New Zealanders would be permitted to enter the country.

SkyCity Entertainment Group rose as its Auckland casino would be able to return to operating at full capacity on Thursday following the NZ government’s decision to move the city to alert level 1 from Wednesday night.

Refining NZ announced it has finalised its proposal to operate the refinery in 2021 under the current Processing Agreement, which will enable it to extend cash neutral operations in a low-margin environment at the Fee Floor.


3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​​​COVID-19 related-flow remains key, with second wave and lockdown headlines, while US Congress debate what an extension of stimulus will look like.
  2. US election developments will be followed closely by markets as we move closer to elections both in the US and NZ.
  3. On the central bank front, in Australia the RBA makes a cash rate decision and the US Federal Reserve released minutes from its last meeting.


Markets also appear to see a greater chance of a clear Biden win in the election, reducing the risk that Trump disputes the result and creates a drawn-out period of uncertainty.

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