Devon Funds Morning Note - 31 March 2025

Monday 31st March 2025

The Big One

Global

The US indices sold off on Friday amid ongoing concern over how US trade policies are evolving and the impact to the economy. Consumers are already forming an opinion. A print from the University of Michigan showed sentiment was at the lowest since November 2002, while long-run inflation expectations are the highest since 1993. Inflation in the here and now is already ticking higher. The Personal Consumption Expenditures index came in hotter-than-expected on Friday, rising 2.8% in February and up 0.4%. The print also comes before the full force of tariffs are to be felt. Wednesday marks Donald Trump’s self-proclaimed “Liberation Day” when a range of sweeping tariffs are set to come in.

The Dow fell 1.7%, the S&P500 dropped 2% and the Nasdaq was 2.7% lower. For the week the indices declined 1%, 1.5%, and 2.6% respectively. Big tech was out of favour on Friday, with Alphabet, Meta and Amazon all down more than 4%. Technology stocks are feeling the most heat – the Nasdaq is on track for a more than 8% monthly decline, which would be its worst monthly performance since December 2022.

It remains to be seen whether there will be any tariff exceptions, and what the tariffs will look like when they come in on April 2. There also remain questions over how trading partners will react. The situation continues to be fluid. Canada’s new PM Mark Carney has evidently had a “productive” discussion with Trump but said that retaliatory tariffs may be brought in. European officials have reportedly looked at ways to adjust value added taxes on US goods to placate the White House.

There may also be a new source of inflationary pressure – oil prices. Donald Trump has said he is “very angry” that Vladimir Putin has criticized Volodymyr Zelenskyy’s leadership, and called for a transitional government. Trump added that the comments were “not going in the right location.” He said that if Russia scuppered any peace deal, he would put secondary tariffs on all oil coming out of Russia, in the order of 25-50%.

Perhaps it is no surprise given trade developments that consumer expectations around inflation are picking up in the US. The University of Michigan’s final read on consumer sentiment for March came in at 57 (from an initial estimate of 57.9, marking the third consecutive monthly decline), as inflation expectations reach multidecade highs. Consumer expectations for the future fell sharply, and the assessment of current conditions also weakened around the potential for pain amid ongoing economic policy developments. Angst rose across both Democrats and Republicans.

Year-ahead inflation expectations jumped up from 4.3% last month to 5.0% this month, the highest reading since November 2022 and marking three consecutive months of unusually large increases of 0.5 percentage points or more. Long-run inflation expectations surged to the highest in 32 years, from 3.5% in February to 4.1%, and across the political spectrum. Trump supporters are also appreciating the inflationary implications of what he is doing.

This is while actual inflation is also picking up. The Core Personal Consumption Expenditures price index came out hotter-than-expected on Friday, rising 2.8% in February and reflecting a 0.4% increase for the month. Both were higher than forecast. Good prices increased 0.2%, and services prices were up 0.4%. Headline PCE inflation remained stable at 0.3% month-on-month and 2.5% annually, but the core measure is the Fed’s preferred inflation gauge and will stoke concerns about persistent inflation.

This is though also while consumer spending in the US seems to be still quite strong. The report showed it accelerated 0.4% for the month, below the 0.5% forecast. It was helped by personal incomes rising 0.8% more than forecast. Households though also grew more cautious with their money, as the personal saving rate increased to 4.6%, the highest since June 2024. US consumers may also be battening down the savings hatches given an anticipated pick-up in inflation. All this will only support the notion that the Fed will continue to adopt a wait-and-see approach with respect to any further rate cuts.

A changing in planned habits from the US consumer was also in evidence from earnings from Lululemon on Friday. The athletic wear company actually beat on earnings and revenue estimates but 2025 guidance came in below expectations, sending its shares plunging 15%. Yoga pants were flying out the door, with fourth-quarter revenue rising by US$400m to US$3.6 billion, and were up 8% adjusting for the extra week during the quarter compared to the year before. Net income rose 12% to US$748 million.

Notably, comparable sales in the Americas were flat, while they grew 20% internationally. Time will tell if Trump’s policies to Make America Great Again have the reverse effect. Lululemon expects first-quarter revenue to fall to around US$2.3 billion. Margins are also set to fall 0.6 percentage points, largely due to the tariff war. The company also conducted a survey earlier this month which found that consumers are spending less due to economic and inflation concerns.

Another big event on Friday was the debut of CoreWeave. The AI tech seller raised US$1.5 billion, the most for a U.S. tech IPO since 2021. Microsoft, Amazon, Google and Oracle are all competitors. The company closed at its issue price of US$40 which was a reasonable effort given market sentiment on the day. CoreWeave rents out access to hundreds of thousands of Nvidia graphics processing units to other large tech and AI companies including OpenAI. Nvidia anchored Friday’s IPO with a US$250 million order. On the subject of OpenAI, Elon Musk said on Friday that he’s combining the company with X into a single entity. Musk said xAI is the acquirer, valued at US$80 billion in the deal, while X (formerly Twitter which Musk acquired for US$44b in 2022) is valued at US$30 billion.

Across the Atlantic, the FTSE100 eased 0.1%. The UK economy performed more strongly than previously estimated in 2024, with annual GDP growth revised up to 1.1% from 0.9%, driven by slight upward revisions in the first half of the year. There was a modest 0.1% expansion in the final quarter. Separately, UK retail sales volumes rose 1% in February, well ahead of forecasts for a decline – interestingly growth was fuelled by non-food purchases, with notable gains in household goods and jewellery.

The STOXX50 in Europe fell 0.9%. Sentiment surveys on the Continent indicated renewed caution. The European Commission’s Economic Sentiment index for the eurozone fell to 95.2 in March, its lowest level since December and contrary to expectations for a modest improvement. Confidence declined across services, retail, and among consumers. In Germany, the GfK/NIM Consumer Climate index edged up slightly to -24.5 for April, though missed forecasts and remained deeply negative. Germany’s jobless rate has also risen more than expected, with the number of unemployed increasing by 26,000 in March to its highest level since mid-2020.

On the stock front, shares in Novo Nordisk eased 1.2% even as the company said its diabetes pill Rybelsus showed cardiovascular benefits in a late-stage trial. Rybelsus is the once-daily oral formulation of Novo Nordisk’s blockbuster diabetes injection Ozempic, which is taken once a week. Both treatments, as well as the company’s weekly weight loss injection Wegovy, contain the active ingredient semaglutide.

In Asia it was a risk off session. The Nikkei fell 1.8%, as rising inflation in Tokyo has set the scene for another rate hike by the Bank of Japan. The CSI300 declined 0.4%. Chinese stocks have been on a run though over the past six months. Since mid-September 2024 the CSI300 has risen 25% and the Hang Seng is 35% higher. Outperformance has been driven by the technology sector which is now back in Beijing’s good books as a means to propel the economy against the backdrop of a trade war.

New Zealand

The Kiwi market had a good week, with a rise of 1.4%. The NZX50 closed though down 0.15% on Friday. Fisher & Paykel Healthcare dipped 52 cents, but Contact Energy rallied 4.1%. Software billing provider Gentrack leapt 10% on unconfirmed reports it has won a major offshore contract, after posting for new jobs to work with Bulgaria’s largest energy supplier and distributor. This week locally there is a business confidence print, building permits, and another dairy auction.

Spirts are high in the agri sector, but consumer sentiment generally remains challenged it seems. The ANZ-Roy Morgan Consumer Confidence Index fell four points to 93.2 in March, with declines across nearly all components. The monthly update was aptly headed “Bit of a slog.”

A net 16% of households disagreed with the question of whether it is a good time to buy a major household item. This eased one point, although it went up for people with mortgages, so that’s probably about people moving onto lower rates. Perceptions of current personal financial situations fell nine points to -21% but a net 16% expect to be better off this time next year, down five points. Perceptions regarding the economic outlook in 12 months’ time fell four points to -20%. House price inflation expectations lifted slightly from 3.2% to 3.4%.

General inflation expectations rose 0.2 percentage points to 4.2%. While that’s a small increase, it’s the first time since June 2024 that expectations have been above 4%. Quite possibly it could have something to do with all the tariff talk, and the potential impact on inflation. That said, there is the potential yet that tariffs aimed at big US trading partners sends cheaper product our way which could be deflationary.

In any event consumers are feeling pretty guarded it sems, although some retailers are telling a slightly less downbeat story. As noted on Friday, Hallenstein Glassons reported a 7.7% increase in half-year sales to $240 million. Margins have eased slightly though and as we have seen elsewhere retailers are having to discount more than usual to get shoppers in the door. Glassons sales in Australia were up 15.8% while those in in NZ were up just 0.2%. Hallensteins sales were were fairly flat at $58.8 million. The company updated that group sales for the first seven weeks are 5.4% ahead of the same period last year, however, margins remain under pressure. The shares ticked up slightly, but are up 30% over the past year.

This morning, the Commerce Commission’s review in prices set by Auckland Airport between 2022 and 2027 claims the airport’s forecast revenue is excessive and targeted returns are unreasonably high. The report said it had overcharged passengers by $190 million. The Commission said that price increases were higher than what was needed to “improve customer experience, build more resilient infrastructure and add additional capacity.” Auckland Airport has announced this morning that it will discount airline passenger charges (by about $1.10 for regional travel to $9.00, $1.70 for domestic jet travel to $12.80, and $4.80 for international travel to $38.90) for the final two years of Price Setting Event 4, bringing targeted return for FY23-FY27 pricing period to 7.82% - within the range the Commerce Commission found to be reasonable.

Australia

The ASX200 rose by 0.2% on Friday to 7,982, making for a 0.6% gain for the week, the second in succession. Technology and healthcare were on the back foot on Friday, but most other sectors were in the green. The gold sector rallied over 3% as prices for bullion hit a record high - Ramelius Resourses soared 7%.

On the downside Paladin Energy fell 4.1%, extending the uranium miner’s decline as it retracted its 2025 production guidance because of unseasonably heavy rainfall at its Namibian mine. Orora fell 8% after the glass bottles and cans maker said it was engaging with France’s competition regulator in an investigation into anticompetitive practises. Shares in fertiliser and explosives business Incitec Pivot fell 1.5% after significant rainfall in Queensland in the first half impacted volumes for its explosives business, while dry conditions in southern states, coupled with ex-tropical Cyclone Alfred, had caused farmers to delay fertiliser dispatches. It has also had supply disruptions elsewhere.

Better news for Downer EDI which has been awarded a $600 million contract with Powerco in NZ to provide electricity field services for up to 12 years. Downer EDI’s estate management contract with the Australian Department of Defence has also been extended for a further six months. Woodside meanwhile is selling its Greater Angostura assets in Trinidad and Tobago for A$206 million, as part of an ongoing project to simplify its portfolio and free up cash.

Tomorrow, we have the RBA meeting. Even though inflation is within the central bank’s target the markets are pricing in a less than 10% chance of a rate cut, but over a 70% likelihood next month. Fair to say the RBA may also be adopting a wait-and-see approach to see how this week plays out on the tariff front.

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