Devon Funds Morning Note - 07 November 2024

Thursday 7th November 2024

Clean sweep

Global

US markets surged on Wednesday as Donald Trump won the Presidential election in comprehensive fashion. Whilst the outcome was largely within the margin of error of the polls, the seven swing states look to have been part of a red, as opposed to blue, wall. The Republicans are also poised for a clean sweep, retaking the Senate and potentially having the balance of power in Congress. Such an outcome would support Donald Trump’s claims of having an “unprecedented mandate.” The Dow Jones soared 1500 points while the S&P500 rallied 2.5% and the Nasdaq surged 2.9%. All three indices made record highs. Tesla leapt 15%. Banks and healthcare were in demand, along with small caps – the Russell 2000 soared 5.9%. The USD rose, as did bond yields, while bitcoin hit a record US$75,000.

It is fair to say that markets liked the result, and any fears over an uncertain outcome were clearly put to rest. While the polls suggested the result was too close to call, in the end all the battleground states appear to have gone the way of the Republicans. Exit polls suggest that voters (up to 70% in some cases) ultimately felt they were worse off than they were four years ago. Messaging around the notion of a soft-landing contrasted with how many Americans feel about the challenges faced in the here and now. As Bill Clinton’s strategist famously quipped “It’s the economy, stupid.”

Markets had been pricing in a Trump victory in the lead-up, and the nature of the win means that the 47th (and 45th) President of the United States has a clear mandate to follow through on policy promises, and with Republicans potentially controlling Congress along with the Senate.

Stocks seen as beneficiaries of a Trump administration surged, including Tesla (Elon Musk is a prominent supporter of the President-elect), which climbed nearly 15%. Stocks tied to the economy thrived, including the banks. JP Morgan Chase and Well Fargo were both up more than 10%. Small caps also rallied due to the perceived benefits from Trump’s tax cuts, spending plans and protectionist policies.

U.S. oil producers were in demand given Trump’s support for fossil fuels, and at the expense of clean energy – solar stocks sold off. There is now a real possibility that Biden’s Inflation Reduction Act will be repealed. Housebuilders were on the back foot, and partly on the view that higher tariffs, along with spending and tax cuts, will push up inflation and see rates higher for longer. The average rate on the 30-year fixed mortgage surged 9 basis points Wednesday to 7.13%. The country’s two biggest homebuilders, DR Horton and Lennar both fell as much as 5%.

Elsewhere, Super Micro Computer fell nearly 20% as the computer server maker disappointed on revenue guidance. Shares in pharmacy chain CVS however soared 12% as quarterly revenues of US$95.4 billion surpassed expectations.

International reaction to the election result was mixed. In Japan the Nikkei soared 2.6% while the Hang Seng fell 2.2% and the CSI300 in China eased 0.5%. China will be bracing for higher tariffs, as potentially will be Europe – the STOXX50 fell 1.4%.

Shares in BMW fell over 6% as the German carmaker reported an 83% drop in net profit to €476 million. The company said it was “on track: for 2024 targets, but that brake system issues and a “challenging market environment in China” were both impacting performance. Shares in Novo Nordisk were also lighter (by nearly 4%) despite third quarter earnings being broadly in line with expectations and as it narrowed its 2024 full-year growth guidance. The weight-loss drug owner said sales of Wegovy were 79% higher in the third quarter of 2024 than a year ago.

Elsewhere in Europe, Commerzbank fell 3% after posting a 6.2% drop in net profit to €642 million in the third quarter amid a broader drop in net interest income and higher risk provisions. The bank though confirmed full-year earnings forecasts of achieving €2.4 billion. UniCredit fell over 5% despite the Italian bank delivered a better than expected 8% year-on-year hike in third-quarter net profit to €2.5 billion. The bank raised its full-year net profit guidance to above 9 billion euros, from a previous outlook of €8.5 billion.

The election result is being seen as a net negative for Europe.

Banking stocks in the UK though were higher. The FTSE was down just slightly by 0.07%. Activity in the UK construction sector expanded for the eighth straight month in October, though growth eased from a two-year high as uncertainty delayed spending decisions ahead of the Autumn Budget. Civil engineering was the best-performing category, helped by energy infrastructure projects, especially within the renewables sector. But housebuilding declined.

UK housebuilder Persimmon fell nearly 8% as housing completions dipped slightly in the third quarter and the company warned of rising building costs heading into 2025. Better news for Marks & Spencer (+2%) with the retail icon reporting better-than-expected first-half profits on the back of its food and clothing segments which have now delivered market share growth for four consecutive years.

Stock wise in Asia, shares in Toyota rose, despite the automaker reporting its first quarterly operating profit drop in two years. The company has had production issues in Japan and the US, while is also facing increasing competition from China. Sales volumes fell 20% year-on-year, but the company upped its dividend and maintained a full-year operating profit forecast of 4.3 trillion yen.

New Zealand

The Kiwi market was fairly flat on Wednesday, with the NZX50 closing at 12549, down just 9 points. The market picked up late morning as the election result became clearer. Fisher & Paykel Healthcare fell 1.8% and Meridian declined 2.3% but EBOS surged 2.8%, and Freightways lifted 1.6%. Spark NZ (which is expected to be leaving the MSCI Global Index) eased 0.8% but Infratil (which is likely entering the MSCI Global index) leapt 2%. It was very quiet in terms of announcements and data.

This morning Stats NZ has confirmed what was already fairly clear – unemployment is rising. In the September 2024 quarter the unemployment rate was 4.8%, up from 4.6% in the previous quarter. Annually, the number of unemployed people increased by 24.2% to 144,900 (not seasonally adjusted). There were annual increases in the number of people who had been unemployed for three to six months (up 47.2% to 29,500), over six months to one year (up 53.2% to 32,500) and over one year (up 55.5% to 16,900).

More people are remaining unemployed for longer periods while the employment rate is declining, as wage growth slows. Annual wage inflation was 3.8% versus 4.3% in the June quarter. The labour force participation rate was 71.2%, down 0.5 percentage points over the quarter and 0.8 percentage points over the year. Over the year, the number of people who were not in the labour force grew by 57,000. A slowing employment situation and rising unemployment will clearly be a poignant part of the data set for the RBNZ which decides on rates in a few weeks’ time.

Australia

The Australian market pushed higher as the election result became clear, with the ASX200 jumping 0.83% to 8200. Banking stocks were in demand with CBA, NAB and Westpac all up by over 1%. Technology stocks were in demand, with Block rallying 4% and Xero gaining 2.3%. The A$ slumped.

Companies exposed to the US surged. Shares in gaming machine giant Light & Wonder leapt 4.7% while News Corp was up 4%. Sleep apnoea devices maker ResMed gained 2.3%. All three stocks are also listed in the US.

The miners were more subdued, with BHP and Rio both closing fairly flat. Lithium companies sold off given Donald Trump’s views on fossil fuels against renewable energy. IGO fell 5.6%. Mineral Resources was down a further 2.5%.

Consumer discretionary stocks pushed higher. Domino’s Pizza Enterprises rebounded 3% following its AGM, and news around its CEO leaving and weak trading (see yesterday’s note). Goodman Group was a touch softer as the real estate company said it expects operating earnings per share to grow 9% in FY25. The company said that the demand for data centres continues to grow, which Goodman is well positioned to support through access to power on existing sites and “proven track record in delivering complex infrastructure developments.” The company is targeting more investment in operational data centres. Goodman shares are up over 40% year to date.

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