Devon Funds Morning Note - 24 January 2025

Friday 24th January 2025

Making the earth move

Global

The S&P500 rose 0.5% to a record high on Thursday, and the Nasdaq finished 0.2% higher. The Dow advanced 0.9%. Old economy stocks were in demand, including Caterpillar, with sentiment towards the construction company boosted by Donald Trump saying he would approve the building of power plants needed for AI. The energy “emergency” was also made clear as Trump addressed a meeting of world-leaders at Davos, calling for cheaper oil prices. He also said that interest rates need to come down in the US and “across the world.” The call comes ahead of next week’s Fed meeting at which the market assigned a near zero probability of a cut. It seems it will all be about what is said. No pressure.

Just over 50 hours or so into his term, President Trump is looking to make not only the US but the world move, it seems. After a barrage of executive orders (including exiting the Paris Climate Accord) Trump made clear to attendees at the World Economic Forum in Davos what his expectations are.

Oil prices eased as Trump said he will ask Saudi Arabia and OPEC to reduce prices. He said if they did this the Russia-Ukraine war would “end immediately.” He said Saudi Arabia was responsible for the war by keeping prices high. At the same time the kingdom appears set to invest US$600b in the US over the course of his term. Trump added that “I’ll be asking the Crown Prince, who’s a fantastic guy, to round it out to around 1 trillion.” Trump also wants to “drill, drill, drill” at home, claiming the US has the largest reserves of oil and gas of anywhere on earth.

Trump also extended the invitation to nations around the world to invest in the United States, promising low tax rates and a looser regulatory structure. The President promised to make the US “a manufacturing superpower, and the world capital of AI and crypto.”

The comments again seem something of a carrot and stick approach, given Trump has also threatened previously to hit trading partners with tariffs. He added “I’ll demand that interest rates drop immediately…and likewise, they should be dropping all over the world. Interest rates should follow us all over.” So much for notions of central bank independence which look set to come under fresh attack from the 47th President. Trump also took aim at European regulators and big banks over the course of his 45-minute speech.

It remains to be seen whether Trump’s tariff policies are implemented in line with recent rhetoric. There would certainly be a cost to American consumers. The head of aluminium giant Alcoa said overnight that US tariffs on Canadian imports would increase the cost of aluminium by US$1.5 billion to $2 billion a year, and would also (along with action against Mexico) damage the domestic supply chain and automotive market.

This would not be ideal given the world’s largest economy is showing some signs of slowing down. Initial unemployment insurance claims edged higher last week while continuing claims hit 1.9 million, their highest level in more than three years.

Also, while US consumers have been resilient, they are also becoming increasingly selective. Coresight has reported that US retail store closures spiked in 2024 and are expected to more than double to about 15,000 this year. Some big retailers are still doing well (such as Walmart and Costco) but others less so (Big Lots, a major discount chain, has filed for bankruptcy). Intense competition from online offshore discounters such as Temu and Shein has also been a factor. 7-Eleven and Macy’s are amongst the big names cutting back on stores.

Americans are also being more selective about travel providers as well it seems. Shares in American Airlines fell 8% overnight as the carrier said it expects revenue to be up just 3% - 5% in the first quarter and forecast a wider-than-expected loss for the first quarter. The airline is suffering from an increase in costs - pilot wages rose by 40% in 2023 following new labour agreements. A failed strategy to circumvent travel agents and sell tickets direct erased an estimated US$1.5 billion off the revenue line last year. In contrast there has been more blue sky in forecasts from rivals Delta and United (see yesterday’s note) which appears better positioned as a premium brand. Despite the fall American Airlines’ stock is still up 20% over the past 12 months while United’s has soared around 160%.

Rising travel demand is though keeping airfares high, as airlines also struggle to bring back capacity due to production issues at the likes of Boeing and Airbus. One company benefitting from this state of affairs is GE Aerospace which is seeing an increase in demand for spare parts and services as airlines look to rely more heavily on their existing fleet. The shares jumped 6% on Tuesday.

Across the Atlantic, there are also some contrasting fortunes amongst big European sportwear brands. While Adidas (quarterly sales up 19%) has helped drive the German Dax to record highs following its result this week, Puma shares fell 22% after it reported lower than expected fourth-quarter sales and a decline in annual profit.

Several factors appear to explain Puma’s and Adidas’ divergent trajectories. Puma has been trying to shift the brand upmarket by focusing on selling higher-priced soccer, basketball and running gear (including the motor racing-inspired Speedcat). In doing so, it appears to have sacrificed some sales by phasing out some cheaper merchandise. Adidas is in much better shape, helped by demand for its retro Samba soccer trainers. Perhaps not so coincidentally Puma’s CEO left two years ago to head up Adidas. Puma’s shares have since gone further on the back foot. Adidas shares have risen 50% over the past year.

The STOXX600 in Europe rose 0.4%. Norway’s central bank kept interest rates unchanged on Thursday at a 17-year high of 4.5%, but officials did say rates will likely be cut in March. In the UK the FTSE100 rose 0.2%. Sainsbury’s though was lower as the supermarket giant said it planned to cut headcount by 3,000 roles (~2% of the workforce) due to a “particularly challenging cost environment”. The company’s cafes are not as popular as they once were and are all being closed.

In Asia, the indices were mixed. The CSI300 in China rose 0.2%, while the Hang Seng fell 0.4%. The Nikkei jumped 0.8%. The Bank of Japan meets today and is expected to raise rates from the current level of 0.25% with inflation proving slightly more persistent.

New Zealand

The Kiwi market was higher on Thursday with the NZX50 rising 0.18% to 13,060. Fisher & Paykel Healthcare hit a record high after a 2.7% gain. Infratil rose 0.2%. Contact ticked up 0.1% following its operating update. Merdian though declined 0.9%.

On the data front Stats NZ released net migration figures and they were not great reading. Migrant departures in the year to November 2024 rose 28% to 127,800, the highest on record for an annual period. A total of 72,900 New Zealand citizens left our shores to live overseas, with 56% of those heading across the Tasman. This is a really serious problem, and the brain drain appears to be accelerating. Kiwis did flock back en masse in Covid but this proved to be just a temporary state of affairs.

It really is a reflection of the tough spot our economy is in. The labour market is weakening, and people can earn a lot more by heading over the ditch and elsewhere. This is also while we are not getting the same number of people moving to New Zealand from overseas. This dropped to 158,400, down 32% on the same period in 2023.

That all equated to an annual net migration gain of just 30,600. This is a far cry from record net migration levels and the 133,300 that was seen a year ago.

The salt in the wounds is that fading migration tailwinds are a further knock to our economy, and compounding the very reason that people aren’t sticking around. It is imperative that we turn things around, and quickly. It was great to hear Chris Luxon talk up economic growth plans yesterday, but this will all take time to filter through, and the RBNZ could also lend a bit more of a helping hand, by getting interest rates down quicker.

On a more positive point, short stay arrivals are faring much better and the tourism industry is picking up (Auckland Airport rose 0.2% yesterday). Overseas visitor arrivals were 321,200 in November, up 17,800 on November 2023. We are at 86% of pre-Covid levels. For the year, overseas visitor arrivals were 3.26 million, an increase of 360,000 on 2023. People are staying for “a good but not a long” time it seems.

There have been quite a few company announcements this morning. Further insights on the challenges facing kiwi retailers have been forthcoming.

Michael Hill International updated that group sales for the 26-week period ended 29 December 2024 were down 1% at $359.1m. Once again Australia is doing better (as is Canada where sales rose 2.7% to a record) than NZ. The company said conditions in New Zealand were “particularly challenging.” Sales here were down 7.8% while they were up 0.6% across the Tasman. Digital is doing well, as is the acquired Bevilles’ business. Debt levels have eased to ~$10m and the company is targeting ~$5m of cost reductions in the second half. Michael Hill sees first half earnings at between $22.5m to $24m, down from $31.3m a year earlier, while overall sales will be only slightly lower (helped by store openings).

KMD Brands has updated that sales trends have continued to improve since October, albeit from a position of weakness. Group and Kathmandu sales are up 1.7%. Oboz’s are down 5.1% but Rip Curl’s are up 2.2%. Group online sales are up 18.4% year to date. Direct to consumer sales are doing better (wholesale is more challenged) and time will tell (as with recent credit card spending figures) if this is more about a holiday bump. KMD is looking to get debt lower (to $50m by the end of July) and expects first half earnings to be in the range of $1 million to $3 million against $15.1m in the year prior.

In the gentailers, Genesis has reported a 42% fall on the prior comparative in thermal generation for the latest quarter, but renewable generation held steady. The company has invested in renewables to increase its flex and Lauriston, the largest solar farm in New Zealand, commenced generation in November. Retail customers grew 4.7% supported by acquisitions. Manawa Energy has reported a 16% fall in quarterly hydro production volumes, which are 18% below expected normal volumes.

Elsewhere, Synlait has flagged a return to profitability, with the company forecasting earnings (EBITDA) for the six months to 31 January 2025 to be in the range of $58 million to $63 million. The ingredients business is doing well and cost reductions are helping the bottom line. The company has outlined an incentive for South Island farmers to commit to the company. It will offer $0.10 / kg MS on top of the base milk price for the next three seasons.

Australia

The Australian market was lower on Thursday, with the ASX200 closing 0.6% lower at 8,378. Most sectors were in the red with the exception of technology (+0.3%) and utilities (+0.4%). CBA was fairly flat, but BHP fell 1.7%.

Iluka Minerals fell 6% after a broker downgraded the production outlook for the critical minerals player. Insignia though rose 2% as one of the private equity bidders sweetened its offer for the wealth manager. Santos was flat after reporting a 10% increase in quarterly revenues to US$1.4 billion. The energy giant’s Barossa Gas project is 88% complete and on track for first production in Q325 within current cost guidance. Fortescue has meanwhile posted a record 97.1 million tonnes in half-year in iron ore shipments.

A big merger is going ahead in the retail sector. Myer shareholders have voted overwhelmingly in favour of a merger with a portfolio of clothing brands owned by Solomon Lew’s Premier Investments. The A$1 billion deal includes brands Just Jeans, Jay Jays, Portmans, and Dotti. Myer is funding the transaction with scrip, with Premier emerging with a 51.5% stake. Premier’s founder, Solomon Lew, will have a seat on the Myer board. The enlarged Myer will have 783 stores, more than 17,000 staff, A$4 billion in annual sales and A$250 million in earnings.

Myer has said the logic for the deal was to leverage the brands through vertical integration, scale, additional margins and loyalty opportunities. Meanwhile, Premier’s board will be focused on growing Smiggle and Peter Alexander, locally and internationally. Myer shares jumped 6%.

Publishing Note: Due to the Auckland Anniversary holiday there will be no note on Monday. We are back on Tuesday.

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