Devon Funds Morning Note - 16 July 2024

Tuesday 16th July 2024

Playing the trump card

Global

The Dow Jones hit a record high on Monday with the 30-stock index closing up 0.5% at 40,211. Healthcare stocks were strong and Goldman Sachs jumped 2.6% after an earnings beat. The S&P 500 also hit a record with a 0.3% rise, while the Nasdaq is also back near last week’s all-time peak, closing up 0.4%. The small/mid-cap Russell 2000 rose 1.8%. Apple hit a record high on broker upgrades, with optimism over AI-inspired earnings growth. The “Trump trade” was alive and well post the assassination attempt, and as the former President appointed ex-marine and author JD Vance as his much younger running mate. Energy and ammunition stocks also rallied, while green energy plays sold off. Fed Chair Jerome Powell buoyed sentiment said that the Fed would not wait for inflation to hit 2% before cutting rates.

A Fed rate cut of 25bps in September is the consensus view, with markets also assigning a 10% probability that the cut could be even deeper at 50bps. A cut at the end of this month has also not been ruled out with odds of 10% according to the CME Fedwatch tool. Jerome Powell did nothing to dispel the optimism around the proximity of easing. Speaking to the Economic Club of Washington, the Fed Chair said that recent data (including last week’s softer than expected CPI) “added somewhat to confidence” that inflation was returning to 2%, before further saying things were in “a pretty good place." Powell added that a hard landing for the U.S. economy was not a likely scenario. This buoyed small-mid-cap names with the Russell 2000 rising to its highest since January 2022.

Commenting on the attempt on Donald Trump’s life over the weekend, Powell said it was a “sad day for our country.” Investors have taken the view that the attack is a pivotal moment that will solidify Trump’s chances of victory in November. Healthcare names such as United Health were in demand. While Republican policies could mean a rise in the ranks of the uninsured (the first Trump administration tried to dismantle the Affordable Care Act), they are seen as creating an expansion of Medicare Advantage, less onerous regulation and less opposition to M&A in the sector. Firearms manufacturers rallied, with Smith & Wesson soaring 11%. Oil services companies were on the up given Republican positive leanings towards energy drilling (and as opposed to Renewables which were weaker – First Solar fell 8.5%). Small caps rallied – Goldman Sachs noted they performed strongly after Trump’s victory in 2016. Shares of Trump Media & Technology meanwhile soared 30%.

The focus on Trump continued on Monday. The “classified documents” case was dismissed by a Florida Judge. The Republican National Convention got underway, and the former President appointed Ohio Senator JD Vance as his running mate. Vance is aligned with many of Trump’s policies but will offer a point of difference in being nearly four decades younger. Vance has an interesting past, being a former marine and the author of the bestselling memoir "Hillbilly Elegy." Somewhat ironically, less than a decade ago Vance stated publicly that he “never liked Trump” and saw him as “noxious and reprehensible.” Views can clearly change.

Stock-wise, Goldman Sachs was higher on a second-quarter earnings beat with the bottom line up 150% to US$3b. Investment banking boosted revenues which rose 17% to US12.7b. Rising M&A activity was a tailwind, with management saying that the deal backlog was “up significantly.” One deal not going ahead is for Macy’s – shares in the department store chain fell 12% as an activist group ended buyout talks.

Apple hit a new record high, with an (unconfirmed) report showing that the iPhone maker’s sales in India surged 33% to US$8b with market share on the up. There is certainly plenty of scope for growth for Apple in a market that is dominated by Android, and where it has less than 4% of the country’s roughly 690 million smartphones in use. India is only 2% of Apple’s total sales. The tech titan only opened its first two full-service stores last year.

Apple may also be looking to India as a way to diversify sales away from China, with trade tensions escalating, and potentially set to increase further with a Trump win. In Asia, the Nikkei was closed while the Hang Seng fell 1.5% and the CSI300 added 0.1%. Second quarter GDP numbers from China disappointed, rising by 4.7% against 5.3% for the first quarter. Retail sales for June missed expectations (+2% vs estimates for +3.3%), while industrial production figures (+5.3%) beat. China’s high-level policy meeting, the Third Plenum, is underway, and it will be interesting to see whether any significant economic initiatives are forthcoming.

Luxury goods makers have also been reliant on strong demand in Asia, but this appears to be slowing down. In the UK, shares in Burberry plummeted 16%. The company said first-quarter comparable store sales fell 21% to £458 million. All regions were weaker with sales down 23% in both Asia-Pacific and the Americas. The company flagged an operating loss for the first half of the year amid weak demand and has axed its dividend as well as its CEO.

The FTSE100 was 0.9% lower, while the STOXX50 fell 1.2%. Industrial production in the eurozone fell (-0.6%) for the first time in four months in May, though the decline wasn't as bad as expected. The largest monthly decrease was recorded in Slovenia (-7.3%), while the highest growth was seen in Ireland (+6.7%). The ECB meets later this week.

New Zealand

The Kiwi market recovered from a morning dip somewhat, with the NZX50 closing down 0.1% at 12,123. Mainfreight weighed, falling 3.6% to give back some of last week’s strong gains and Infratil was 2.2% lower. Mercury dipped 1.7% while Meridian and Contact were also softer. At the other end, Spark NZ rallied 1.1% and Fisher & Paykel Healthcare was up 0.9%. Summerset increased by 1.8% and Tourism Holdings gained 4.1%.

Auckland Airport jumped 0.8%. The company reported that total passengers through the terminals for June of 1.36m were down 1% from a year ago, and 89% of the pre-Covid equivalent. International passengers were up 6% while domestic was down 4% compared to June 2023.

Manawa Energy eased 0.7% following its quarterly report. The company said that the quarter was characterised by low inflows, declining hydro storage but strong demand and elevated gas prices. Dry conditions saw hydro volumes 16% lower than long-term averages. Wind volumes were 12% below average.

NZ’s housing market meanwhile continues to be pushing against a stiff breeze. June data for REINZ has house prices up 1.3% year-on-year in June. Auckland was up 1.6%. On a monthly basis prices were down 0.7% nationally and flat in Auckland. Prices are still moving sideways or thereabouts. It is taking longer for places to sell, with supply increasing. Buyers can be more discerning, and there are certainly fewer of them than there were. Opinions remain split on the immediacy of the impact of any rate cut by the RBNZ. One would have to think it wouldn’t hurt, but at the same time may not see a sudden surge in house prices, and certainly not back to late 2021 levels.

As noted yesterday the manufacturing sector remains on a long contractionary streak, and the services sector is also doing it tough. The BNZ Business NZ Performance of Services Index (PSI) showed that the services sector fell even further in June. The report was titled “Sinking” and the reading of 40.2 was down 2.4 points from May and for the second month in a row, the lowest level of activity for the sector for a non-COVID lockdown month since the survey began in 2007. Subdued housing sales (shown above) are acting as a drag, while the lift from tourism is also flattening out.

Activity/Sales and New Orders/Business were both the lowest for a non-COVID lockdown month. Employment was at its lowest point since February 2022, while Supplier Deliveries was the lowest since March 2022. The proportion of negative comments for June (67.0%) was up on May’s 65.4%. Respondents continued to note the “recessionary aspects” of the current economic downturn. A rate cut cannot come too soon for many parts of the economy.

Australia

The Australian stock market hit a record high on Monday, going above 8,000 for the first time ever. The ASX200 gained 0.7% to 8,017. The benchmark has taken just over three years to add 1000 points since reaching 7,000 in April 2021. Optimism over falling inflation globally and optimism around rate cuts by the Fed and others stoked sentiment yesterday, as did the Trump trade to an extent. This all offset any concerns over the weaker GDP data out of China.

Commonwealth Bank of Australia rose 0.8% to a new record high. BHP was also up 0.6%. Healthcare stocks were in demand with CSL up 0.6% and ResMed leaping 2%. Property was up over 1% as was technology and consumer discretionary. Xero and Aristocrat Leisure both rallied 1.4%.

All sectors were in the green, but not all stocks. Aussie Broadband fell 14% after it lowered earnings guidance for FY25 to between A$125 million and A$135 million, down A$10m from previous guidance. The company is looking to take on bigger rivals with price cuts, and a new discount brand for broadband services. Land lease operator Lifestyle Communities fell 18% after media reported that residents were accusing the company of immoral and unethical conduct. The company has rejected the allegations made by customers in applications to the Victorian Civil and Administrative Tribunal.

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