Week Ahead, Tech Tensions | Kathmandu Update

11 August 2020

Global markets were mostly higher on Friday (S&P 500 Index +0.06%), although the technology sector gave back some of its recent gains which weighed on the US market. 

While a better-than-forecast jobs report helped fuel advances for smaller US companies  this was overshadowed by renewed US-China tensions. Trump announced would ban Tik Tok in 45 day’s time & surprisingly singled out WeChat, owned by Tencent. This could in extreme case result in de-listings of firms such as Baidu & Baba in US. Tech names weaker on Trump sentiment while broader market held up. The geopolitical backdrop for markets was getting more difficult and would continue to do so ahead of the US elections in November. 

Kathmandu (KMD:NZX)
 KMD shares have partially recovered after crashing down to all-time lows amidst the covid-19 pandemic. The recovery has been partly due to initially being oversold, as well as a surprise boost in sales post lockdown (online and physical stores) – beating expectations and helping KMD to avoid significant cash burn.

We believe the current share price reflects some negativity – but KMD shares still aren’t "cheap"  given our pessimistic view on the retail sector, particularly on discretionary items given the huge amount of economic uncertainty and the recent retail data could reflect “pent up demand” post lockdowns. Government wage support and stimulus is also temporarily supporting consumer spend. KMD investors have to be mindful of the three capital raises KMD have undertaken over the last two and half years diluting ownership, and KMD trades a relatively high price to earnings multiple of 19x – due weaker earnings likely to continue going forward over the medium-term. We are happy to watch from the side-lines and remain HOLD rated.  

 

Australia & New Zealand Market Movers

The Australian market was lower on Friday (ASX 200 -0.6%). 
Real estate company REA Group shares were up after hitting a five-month high earlier in the session. REA reported a 7% increase in net profit over the past financial year but warned  of significant short-term weakness in real estate listing volumes in light of the current lockdown in Melbourne. However, it said it had reduced operating expenses over the year. Fresh record prices for precious metals saw gold mining stocks add to recent gains.

The New Zealand market fell on Friday (NZX 50 Index -1%) after Rio Tinto quashed rumours production was ramping up at the Tiwai Point aluminium smelter and the market's biggest stock, Fisher & Paykel Healthcare, fell after rival ResMed reported disappointing earnings.

Rio Tinto has stated there are “no current plans” to reopen the fourth potline at Tiwai, potentially lowering hopes Tiwai plans to delay its 2021 exit. A final decision on Tiwai’s exit is expected in four to six weeks.

3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​​​COVID-19 related news-flow remains key, with second wave and lockdown headlines, while US Congress debate what an extension of stimulus will look like.
  2. Trade tensions between the US and China look to have escalated once again. 
  3. Closer to home, the NZ corporate reporting season kicks off today with Vital Healthcare and Contact Energy the first to announce profits on Monday. The Reserve Bank of New Zealand also makes an interest rate decision.
Global markets were mostly higher on Friday (S&P 500 Index +0.06%), although the technology sector gave back some of its recent gains which weighed on the US market.

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