Global markets were little changed on Friday as investors look ahead to events this week, including the chance of new US trade tariffs aimed at China and a US Federal Reserve decision.
The US Federal Reserve meets for the first time on Thursday morning (AU/NZ time) under its new chairman Jerome Powell. The consensus is that Mr Powell will almost certainly lift official rates to 1.75%, pushing the Fed funds rate above Australia's equivalent for the first time since 2001. We will be watching developments closely, particularly around comments on the outlook for inflation.
Politics also remain in focus, as uncertainty remains with a number of Trump administration changes and risks of a potential trade war. Trump continues to talk tariffs, with China becoming the most recent area of focus.
Stock in Focus: Wesfarmers (WES:AX)
The big news on Friday was that conglomerate Wesfarmers (WES) will de-merge supermarket chain Coles, which will be a top-30 listed company in its own right if shareholders approve the demerger. Shares in the conglomerate WES led the benchmark ASX up 6.3%.
The demerger is expected to be completed in the 2018-19 year and has clearly excited the market. WES will retain a 20% stake in the business "to support strategic alignment between Wesfarmers and Coles in relation to various growth initiatives, including in the areas of data and digital". Chief executive Rob Scott said Wesfarmers is "repositioning its portfolio to target a higher capital weighting toward businesses with strong future earnings growth prospects". WES's remaining businesses will include Bunnings, Kmart, Officeworks, and its industrials portfolio.
Wesfarmers, which acquired the Coles Group in 2007, said the decision came after a review of its portfolio and the use of its capital; around 60%of the group's capital is employed in the supermarkets business, which accounts for 34% of its earnings. We have held a cautious view towards WES as the sector Coles operates in is very tough – with intense competition in the Aussie supermarket space driven by German retailer Aldi.
We currently have a HOLD rating on WES.
Members should look out for a full update on WES to be released in this week’s weekly report.
Australia & New Zealand Market Movers
The Australian share market made gains on Friday (ASX 200 index +0.48%) defying weakness across Asian markets and trimming the Australian sharemarket's loss for the week to -0.2%. Wesfarmer’s rally supported the ASX. In other news, Metcash shares were weaker after its supermarkets boss Steven Cain was poached by Coles, where he will replace managing director John Durkan. Premier Investments' first-half net profit rose 9.4% to $78.6 million it revealed on Friday, with the Smiggle and Peter Alexander brands each posting strong double-digit sales growth.
The New Zealand market was a touch higher on Friday (NZX 50 index +0.12%) in heavy turnover amidst index rebalancing, with Comvita and Sky Network Television gaining while Pushpay and A2 Milk Co dropped. Moving out of the NZX 50 index was Metro Performance Glass, replaced by Gentrack Group. Metro Glass was unchanged while Gentrack rose 3.4%. The NZ market index is back at a record high, primarily driven by A2 Milk.
3 Things Markets Will be Watching this Week
1. Global politics remain in focus as details around trade tariffs to be implemented by the Trump Administration are announced.
2. The US Federal Reserve makes an interest rate decision Thursday morning (AU/NZ time).
3. The Reserve Bank of New Zealand also Reserve makes an interest rate decision Thursday morning..
Have a Great Day,
Team