Devon Funds Morning Note - 13 September 2022

Tuesday 13th September 2022

Global

US markets pushed higher overnight as investors await the CPI print due out on Tuesday. Investors expect inflation to have cooled further and this is also the view of consumers according to a survey from the Federal Reserve Bank of New York. Just like Covid, inflation would appear to be declining in intensity. The Dow Jones rallied over 200 points while the S&P500 gained 1.1% and the Nasdaq rose 1.3%. Apple rose nearly 4% on reports of strong demand for the iPhone14.

The Consumer Price Index print tonight is expected to see inflation cool to 8% in August from 8.5% in July. Falling fuel/oil prices are set to be a key instigator of weakness, but inflation is softening in other areas including food and other commodities. The fact that supply chains are also freeing up will also be helpful.

This is all feeding through to the mindset of US consumers, who have moderated their expectations of inflation over the next 12 months to 5.7%, down from 6.2% in July. On a 3-year view, expectations have fallen to 2.8% from 3.2%. Consumers are optimistic around the notion that petrol and house prices, two big drives of inflation during the pandemic, will not increase significantly in the year ahead. Fortunately, Americans are not as exposed to the soaring price of gas as is the case across the Atlantic in Europe.

House prices, like many other places around the world, surged during the pandemic. Expectations for house price growth are now the lowest since July 2020, with rising mortgage rates taking the heat out of the equation. While falling house prices might be seen as dampening the mood, this doesn’t appear to be the case. Perhaps Americans are less hung up on marking-to-market the value of their homes every five minutes as we do in New Zealand!

Overall, American’s perceptions of their household’s current financial situation compared to a year ago has improved. It is amazing what a little easing of intense inflationary pressures will do.

Over in Europe and the UK, cost of living pressures remain elevated, and this is impacting spending power. The UK economy returned to growth in July, after a decline of 0.6% in June, but the expansion of 0.2% was some way less than the 0.5% expected. The UK services sector was the main driver of the rise, while production and construction contracted for the second month in a row. The tepid growth means that the UK economy is just 1% above its pre-Covid level in February 2020.

While the Queen’s funeral is a huge deal, and the first state funeral since that of Winston Churchill in 1965 (Princess Di was not afforded one), it will not come without some cost to the economy. It is estimated that the public holiday to mark the occasion will shave 0.2% off UK GDP. Tourism and hospitality industries will largely be closed, and not get the boost that they did during the Jubilee.

There is however better news in the UK’s efforts to avoid a technical recession. Consumers should be at least in better shape than they otherwise would be with the government capping energy prices. Liz Truss is also set to reverse a hike in the National Insurance put through in April. Plans to increase the corporate tax rate from 19% to 25% next year are also likely to be put on ice.

Another economy set to grow this year despite surging gas prices is Germany. The IFO Institute has though reduced its forecast to 1.6% from 2.5%. Europe’s largest economy is expected to contract 0.3% in 2023, as inflation is expected to hit 9.3%. The European indices however appeared more upbeat about the global trend for lower inflation. The German Dax surged 2.4% and the STOXX600 rallied 1.8%.

New Zealand

The kiwi market lifted on Thursday, with the NZX50 adding 0.47% to close at 11,813. Fisher & Paykel Healthcare rose 1.44% and is back above the $20 mark. Fonterra Shareholders Funds units soared 5.8% to $3.31. Sentiment has been buoyed by Fonterra announcing on Friday that it has revised its 2023 forecast earnings guiding to 45 to 60 cents per share, from 30 to 45 cents per share. This is a big jump, with management citing ongoing strong dairy demand as a key driver. Constrained supply has also been a tailwind. This has lifted pricing, and the company has said earnings guidance could well be raised again.

It was a good day for the dairy sector. A2 Milk shares rose 2.9% and Synlait Milk was 1.2% higher after the latter announced it had received approval to keep making A2’s Chinese label infant formula in China. This will be a relief with product registration due to expire later this month. China is overhauling food safety rules in this lucrative market.

Baby steps. The extension only takes A2 through to February next year, at which time there will be another regulatory process to undergo. China is a key market for A2 in which it is estimated to have 4-5% market share. A2 has been doing well in the country recently despite a declining birth rate. Infant formula sales were up 25% in the 2022 financial year. A2’s shares have rebounded around 50% since the lows of May. At $6.40 they are still well down on the $20 seen in July 2020.

Genesis Energy ticked higher after announcing Malcolm Johns as CEO. Mr Johns. Has been CEO of Christchurch Airport since 2014. On the subject of travel, Stats NZ reported yesterday that overseas visitor arrivals exceeded 100,000 in July, for the first month since March 2020.

It all feels like things are getting back to normal. Mask mandates are gone, as is the traffic light system. All go!

Australia

The Aussie market rose for the third consecutive session, with the ASX200 lifting 1.02% to 6,964. Almost every sector was in the green. All four major banks posted solid gains. Consumer Discretionary stocks rallied 1.5%, and the Mining sector was 2% higher, with commodity prices stoked by concerns over supplies and an easing in the US dollar. Nickel prices, a key metal for the EV market, have jumped 4% on falling inventories. Iron ore prices are back above US$100 a tonne on signs of rising steel manufacturing activity in China.

Mineral Resources had another strong day, jumping 2.2% and hitting an all-time high during the session. Mineral Resources has been a strong contributor to the performance of the Devon Trans-Tasman Fund recently. Key drivers for the business going forward are earnings upside from lithium prices, an expansion of their iron ore business over the next 2-3 years and future opportunities in lithium processing and gas production in Western Australia.

Atlas Arteria declined 2.1% after it confirmed that it is participating in the sale process for the Chicago Skyway toll road. IFM Investors however, which owns almost 20% of Atlas Arteria, has said that it does not support the company buying a majority stake which could cost more than $2 billion.

Don’t forget we have the special webinar tomorrow with Devon Managing Director and Portfolio Manager Slade Robertson who will be joined by Portfolio Manager Tama Willis. Slade and Tama will be recapping the recent earnings season, and providing a view on their outlook, and how the Devon portfolios are being positioned. The webinar will be held tomorrow at 10am. It will be an interactive webinar with the opportunity for participants to ask questions.

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