Devon Funds Morning Note - 20 May 2024

Monday 20th May 2024

Roaring Forties

Global

The Dow Jones closed above 40,000 for the first time ever on Friday, notching up its fifth consecutive winning week as enthusiasm firmed further around the state of the economy. Falling rates of inflation have also seen investors bring forward their expectations around the timing of interest rate cuts. The Dow Jones rose 0.3% on Friday, for a gain of 1.2% for the week. The S&P500 and Nasdaq rose 1.6% and 2.1% respectively, clinching their longest winning streak since February. After a challenging start to April, the indices have the wind in their sails again this quarter. The S&P500 and Nasdaq are now both up 11% so far in 2024, while the Dow has climbed more than 6%.

Technology stocks have been the highest profile gainers this year, with Nvidia front and centre – the AI darling was 2% lower on Friday, but is up over 20% over the past month, and has risen more than 90% this year. The company will be in the spotlight this week as it reports quarterly results – expectations are high. The tech sector put on more than 3% last week, led by another chip name in Advanced Micro Devices.

The rally has though broadened to other sectors and names. Real estate and healthcare were strong last week. Moderna rallied 13% last week in the wake of recent results and as the mRNA-vaccine maker looks set to win a European patent case as part of a dispute with Pfizer/BioNTech, as it looks to recoup pandemic profits from its rivals.

Increasing optimism amongst investors is also showing up in flows into equities. Bank of America said on Friday that inflows for US equities rose US$12.35 billion over the past week, marking the biggest inflow in seven weeks. In addition to numbers from Nvidia, this week investors will have numbers from older economy stocks Lowe’s, Target and Coca-Cola to digest. Also subject to dissection will be the minutes from the last meeting of the US Federal Reserve.

Technology will be in focus as ever with the AI train continuing to thunder on. Microsoft is holding its Build developer conference at which it will showcase its latest artificial intelligence projects. Microsoft’s ecosystem arguably gives it a distinct advantage as it looks to get ahead in the AI race. Microsoft’s CEO said a few months ago that 2024 will mark the year when AI will become the “first-class part of every PC.” Microsoft has its Copilot chatbot assistant, and investors are expecting to hear more about how AI will be embedded in Windows.

Also getting in on the AI act is Reddit. The shares jumped 10% to a record high on Friday as the company announced a partnership with OpenAI. The deal will allow the ChatGPT maker to train its artificial intelligence models on Reddit content. OpenAI previously announced a similar deal with Google. In exchange, Reddit will begin offering certain AI features to users and moderators, powered by OpenAI, which will also become a Reddit advertising partner. Reddit executives were somewhat bullish about how the company fits into the picture, claiming “Reddit has become one of the internet’s largest open archives of authentic, relevant, and always up to date human conversations about anything and everything.” OpenAI CEO Sam Altman also has a reason to be upbeat - as a former board member he is a major shareholder in Reddit, with a stake valued at about US$750m.

Reddit aside, the surge in meme stocks may have proven fleeting. GameStop fell 20% on Friday, after the video game retailer announced plans to sell additional shares and also reported a drop in first-quarter sales to US$872 million-US$892 million, down from around US$1.24 billion a year ago, and below consensus expectations of US$1 billion. Net losses are though expected to be lower than last year. The pandemic favourite was up 150% at one point last week as social media influencer Roaring Kitty returned to the scene, before closing down over the course of the week.

Across the Atlantic, the FTSE00 eased 0.2% but is coming off a record high, as is the STOXX50 which faded 0.1% on Friday. A standout performer last week was telco BT Group which rallied 25% (see Friday’s note). UK consumer price index figures for April will be in focus this week, along with April factory and services activity data in the Euro area and the UK (as well as the US).

In Asia the Nikkei in Japan had a strong week, but was 0.3% lower on Friday. Japan’s economy contracted unexpectedly in the first quarter, as consumer spending slowed due to subdued wage growth, corporate investment declined, and exports fell. The earthquake in Tokyo also had an impact. GDP fell 2% on an annualised basis, above forecasts for a 1.2% decline. Fourth-quarter GDP data was also revised down to flat growth, marking nine consecutive months without economic expansion. The data will be complicating the Bank of Japan's plans to lift interest rates.

The CSI300 gained 1% on Friday. Industrial production in China rose by 6.7% in April from a year ago. This was above expectations (+5.5%), and a big lift from the 4.5% in March. Fixed asset investment also rose by 4.2% - a little lower than expectations. But consumption is still in the doldrums. Retail sales rose by 2.3% in April from a year ago against expectations for 3.8%, and a fall from the 3.1% lift in March. So, there has been a lift in supply and activity in the industrial sector but not much demand in the domestic economy. The surveyed unemployment rate is though improving – this fell from 5.2% to 5.0%.

There is still a big drag on the economy from the property market – property investment and residential property sales are still soggy. New home prices have fallen for a tenth month in a row in April. The 0.6% month-on-month decline was the sharpest drop since November 2014. The central bank has responded. The People’s Bank of China has outlined stimulus plans to support the property market, providing 300 billion yuan to financial institutions to lend to local state-owned enterprises so they can buy unsold apartments that have already been built. The central bank also removed a floor on mortgage interest rates, and lowered the minimum down payment ratio for first- and second-time home buyers.

The unveiling of the plans has been claimed as being historic. A company with another historic unveiling was Chinese company Xpeng AeroHT, an affiliate of Xpeng, which is seeking to deliver a “flying car” to customers in 2026. The Chinese EV maker had already introduced the Land Aircraft Carrier (a large truck with a flying two-seater passenger electric drone inside). The flying car can detach from the truck, and people can then get into the drone and fly it. Execs said that the car is not designed for use in urban centres, but for “outskirts in scenic areas” where the company will “work with municipalities to create flying parks and flying zones."

New Zealand

On Friday the NZX50 narrowed its decline for the session to 0.24%, closing at 11,699. For the week the benchmark was 0.5% lower. On Friday the big gentailers were all lower by 1-2%, while Fisher & Paykel eased 0.5%. Freightways dipped 2.6%. On the upside EBOS and Auckland Airport both gained 1% on Friday.

The big news on Friday in the retail space was that the CEO of the Warehouse is stepping down. Given the recent sales downgrade, the closure of The Market.com, and the selling of Torpedo 7 for $1 earlier this year, there was perhaps some inevitability about the announcement. It has been an unprecedented period for retailers in recent years with Covid, the post-Covid bounce, and then cost of living pressures coming to the fore. Nonetheless some retailers have performed better (such as Briscoes) than others.

The Warehouse has arguably lost its connection with customers, and there is confusion over the proposition. Acquisitions and new ideas (the Market was lauded by the company as being NZ’s version of Amazon) haven’t worked. Nick Grayston has been praised for his work on sustainability and agile work practices but ultimately his card will be marked by investors by the share price more than halving during his tenure. New ideas are needed, and as the company noted on Friday, “a change in direction is necessary.” As such It seems unlikely that any appointment will come from internal ranks.

There was better news for SkyCity Entertainment which has reached an agreement with the Australian Transaction Reports and Analysis Centre (AUSTRAC) to pay a penalty of A$67m for anti-money laundering breaches at the Adelaide casino between 7 December 2016 and 14 December 2022. The agreement needs to be approved by the Federal Court. Sky City can soon draw a line under the matter and move forward. There are meanwhile reports circulating today that Star Entertainment is in the sights of a US suitor. Star has been by far and away the biggest culprit in terms of poor governance in the sector (a second public inquiry is underway – see below for more details). Any successful bid for Star would have pricing implications for Sky City which would become the last listed casino stock in Australasia.

We have the earnings season kicking off today. Infratil is the biggest name out this week, with expectations that the company’s data centres and telco (Vodafone) businesses will be doing well.

Also in focus this week will be credit card spending and retail sales figures. The consumer is certainly one pain point in the economy, and this will not be lost on the RBNZ which makes is rate decision on Wednesday. No change is expected, but there will be close attention to the tone, with the growing view that a rate cut is needed in the coming months.

Australia

There is also a rate decision across the Tasman. The RBA is due to make its decision, and attention has switched from whether another rate hike will be seen this year, to when rates will be eased. Inflation data has been more positive of late, and the jobless rate rose faster than expected in April.

On Friday the ASX200 was 0.85% lower at 7,814, but was up 0.8% over the course of the week on optimism around rate cuts. Most sectors were lower on Friday, with technology down 3% (Xero reports this week). The mining sector however was firmer, with BHP gaining 0.8% and Rio jumping 1.4%. Iron ore prices lifted towards US$120 a tonne on optimism around China’s policy steps. Commodity prices have meanwhile pushed higher – including copper and also precious metals – silver is up 25% this year.

Top of the boards on Friday was Bendigo & Adelaide Bank which soared 8.2%. The regional lender announced that cash profit for the 10 months to April 30 is down 2.3% to A$464 million. Net interest margins have held at 1.87%, and the company said that credit impairments were at low levels.

Star Entertainment (-2.2%) was in the frame on a couple of counts. The casino operator announced the licence suspension for its Gold Coast and Brisbane casinos will be extended from May 2024 to December 2024 by order of the Queensland government. The company is undergoing a second inquiry and regulators will have more time to assess the outcome. Star now finds itself between a rock and a hard place it seems. It has been reported that US entertainment giant Hard Rock Hotels and Casinos is considering taking control of the struggling gaming group. Hard Rock operates The Mirage in Las Vegas along with more than a dozen other casinos. With Star struggling to keep its casino licenses, the proposal would evidently transform Star’s properties into “entertainment destinations” focused on live music, food and beverages, and hotels.

The chips though were up for Warriors over the weekend. Battling recent form and decimated by injuries, it was a great win against the reigning Premiers. Up the Wahs!

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