Global markets were higher on Friday as robust earnings from Alphabet and Starbucks have pushed the US S&P 500 and Nasdaq indexes to record highs, with support from data showing US economic growth slowed less than expected in the second quarter.
A theme across company earnings reports so far show an economy that is solid but still shadowed by a pile of concerns, which only bolsters investors' expectations for the Federal Reserve to cut interest rates.
For the week ahead, the big focus for investors will be the US Federal Reserve's interest rate decision on Thursday morning (AU/NZ time). The outlook for interest rate is and has been a key driver of markets this year and while some expect a 0.5% rate cut, we believe a 0.25% cut is the likely outcome.
Stock in Focus: A2 Milk (:NZX / A2M:ASX)
A2 Milk shares continue to soar, breaking into new all-time highs as investor sentiment continues to remain positive for the milk marketing company.
A2 Milk delivered a strong third quarter result which was largely in line with market’s high expectations as group revenue for 9 months to 31 March 2019 was $938m, up +42% on the same corresponding period last year.
China also announced a plant to cut their reliance on imports of infant formula, down to 40% (from approximately 53%) which could limit A2 Milk’s long-term growth opportunity. A2 Milk currently has a 6% market share in China across its large cities so it is not a massive issue. While there might be plenty of room for A2 Milk to grow over the medium-term to double or even triple current sales volumes, it does create a more competitive environment against other international suppliers.
Given the share price run (A2 is now trading above 40x earnings), we would suggest investors to take profit, although leave our recommendation unchanged as A2 continues to deliver and we still see the stock as best in class.
We currently have a BUY (High-Risk) rating on A2 Milk.
Australia & New Zealand Market Movers
The Australian ending the week with a dip on Friday (ASX 200 index -0.36%) despite gains for the mining and energy sectors. Putting things into context, for the week the ASX200 finished up 1.4%, and up is 2.6% so far this month. In stock news, Star Casino said it will push on with plans to build a $530 million tower on Sydney's waterfront despite it having been rejected by planning authorities. Mineral Resources was the best-performing index stock, up +8% after saying it had refinanced its debt and was increasing its iron ore production.
The New Zealand market sold-off on Friday (NZX 50 index -0.83%) led lower by Sky Network Television. In stock news, Metro Performance Glass shares fell as it provided subdued earnings guidance for the 2020 financial year, and said it will cut debt at a faster pace.
3 Things Markets Will be Watching this Week
- US Corporate earnings season continues this week with major companies such as Apple set to report earnings numbers.
- The big event for the week will be the US Federal Reserve's interest rate decision on Thursday morning (AU/NZ time).
- Important monthly US manufacturing data and employment figures are released at the end of the week.
Have a Great Day,
