Devon Funds Morning Note - 15 November 2024

Friday 15th November 2024

A Wonderful World

Global

The post-election rally took a breather overnight with the Dow and S&P500 both dipping 0.3%, while the Nasdaq was 0.4% lower. The US dollar index hit the highest level in a year. The narrative of inflation being under control remains undisturbed for now – US producer prices ticked up last month, but in line with estimates. On the stock front, Disney was prominent surging 7% on a better-than-expected result, driving by its streaming business. Luxury goods names were also in the news – Burberry’s UK-listed shares soared over 17% as the company announced a strategic overhaul.

US wholesale prices rose 0.2% last month, and 2.4% on an annual basis. Core PPI, which excludes food and energy, rose 0.3% on the month, with the 12-month rate of 3.1%. There are still some sticky elements though – service inflation rose 0.3% for the month. On Wednesday the Consumer Price Index came in line with estimates, up 0.2% in October, and an annual inflation rate of 2.6%. Shelter prices continue to a major contributor to inflation. Overall, the releases have not disrupted the view that the Fed will cut rates by another 0.25% in December.

The soft economic landing scenario remains in play with the labour market also coming down gently. Initial filings for unemployment benefits were 217,000 last week, down 4,000 from the previous period and lower than the 220,000 estimate. Continuing claims fell 11,000 to 1.873 million.

On the earnings front Disney reported a 6% increase in quarterly revenues to US$22.57 billion and a 75% lift in net income to US$460 million. The company’s entertainment segment reported nearly US$1.1 billion in profit. Five years after launch, Disney+ is now profitable, and grew global subscribers by 4% to 122.7 million. Executives said they were very optimistic about the future of streaming. Like Netflix, Disney is also seeing strong appetite for its cheaper ad-supported tier - more than half of new subscribers in the US are choosing this.

Disney has also been smashing it at the box office. “Inside Out 2” was the highest grossing animated movie of all time, while “Deadpool & Wolverine” was the highest grossing R-rated film of all time. Upcoming releases of “Moana 2” and “Mufasa: The Lion King” are also expected do well. Disney’s entertainment business is making up for softness elsewhere, including at the theme parks where attendance has declined from peak post-Covid levels and visitors are spending less. Overall Disney sees high-single-digit earnings growth for FY25.

Also delivering an expectations beating result was Cisco. Revenue though fell for the fourth straight quarter, down 6% to US$13.84 billion. Security revenue doubled but networking revenue plunged 23%. U.S. government agencies have delayed deals, but AI driven demand has been strong. Cisco said orders from large-scale clients for AI infrastructure exceeded US$300 million in the quarter. The company expects to exceed its target of US$1 billion of AI orders this fiscal year and lifted full year guidance for earnings and revenue. The shares though dipped 2% on a soft day for tech stocks.

Amongst the “Magnificent 7”, Meta shares eased as the European Commission fined the company €797.72 million over “abusive practices” benefiting Facebook Marketplace. Meta said it will appeal the decision. There was an interesting announcement from Amazon which has been looking to push into healthcare in recent years (launching an online pharmacy in 2020 and buying a primary care provider for US$3.9 billion in 2022). Prime members can now access fixed pricing for common conditions (treatment for men’s hair loss runs at US$19 a month). The move places Amazon in competition with other direct-to-consumer marketplaces including Hims & Hers Health (shares of which fell 15%). Prime members will pay for a consultation with a clinician and the medication.

The luxury goods sector was drawing attention overnight. Versace and Jimmy Choo parent Capri rose over 4% after a merger agreement with Coach maker Tapestry was terminated. The deal had been blocked by the Federal Trade Commission. Tapestry shares jumped 12%.

Luxury goods names generally have faced some challenges this year, amidst weaker demand, and headwinds in key markets such as China. Burberry is looking to win back shoppers by refocusing on “heritage designs and statement pieces.” The company’s latest CEO said the brand has drifted too far from its core products over recent years. Burberry shares rose 9% in London, but are down over 40% year to date.

The FTSE100 rose 0.5%. Insurance giant Aviva saw its shares rally 4% on a strong quarterly result with double-digit gains in general insurance premiums, life insurance and retirement sales, and wealth net flows. Private equity firm 3i was up by a similar amount on its results, while United Utilities also rose as revenues at the water supplier topped the £1bn mark in its first half.

In Europe the STOXX50 surged 2%. Shares in ASML (the fourth most valuable company in Europe) soared 7% as the Dutch chip giant confirmed plans to deliver annual revenues of between €44bn and €60bn by 2030, with a gross margin of between 56% and 60%. That represents sales growth on average of between 8% and 14% over the next five years. At its investor day, ASML said the long-term outlook for the semiconductor industry "remained promising", fuelled in part by the boom in AI. Also riding the AI boom is Siemens. Shares in the German tech group said orders were up 10% in the quarter and that data centres will drive demand for its transformers and grid technology in the coming year. The company’s CEO said that Donald Trump’s proposed tariffs will lead to higher global inflation.

Data wise employment in the Eurozone ticked up 0.2% in the third quarter, twice as fast as expected. The economy grew 0.4% over the period. Europe could also be heading for a soft landing it seems.

In Asia, the Nikkei fell 0.5%, while the CSI300 fell 1.7% - Chinese markets have been volatile but are still higher month to date. Another company reinforcing the theme of strong AI demand was Hon Hai Precision which beat on earnings. The Taiwanese company is a hardware partner to Nvidia and expects AI server sales to make up 50% of its total server business in 2025, with triple digit growth.

New Zealand

The Kiwi market was a touch higher on Thursday, with the NZX50 rising 0.15% to 12,692. A2 Milk surged 2.8%. Meridian rose 0.5%. Freightways was 1% higher and Mainfreight gained 0.9%. Fisher & Paykel Healthcare eased 0.5%, and Auckland Airport fell 1%.

The main announcement of the day was from Infratil. The company reported a half-year loss of $206.4 million which was a substantial reversal from a net profit of $1.19 billion a year ago. The prior period included a $1.1b revaluation of the company’s stake in One NZ, while the current period had ~$63m of foreign exchange and derivative revaluations. On an underlying basis, proportionate earnings (EBITDAF) increased by 25% to $506m. Adjusting for the fact that it was the first period of full ownership of One NZ, earnings were up 7%.

Given Spark’s recent earnings downgrade, One NZ performed somewhat better. One NZ doesn’t have as much government work so doesn’t have the same cyclicality. One NZ also appears to be managing pricing well. Earnings here rose 9% to $304m and full year guidance has been set at $580-620m. The business was also in the news as the Commerce Commission has taken action against the telco over an ad campaign claiming over 100% mobile coverage claims related to a partnership with Elon Musk’s Starlink. One NZ intends to fight the charges.

The bigger CDC unit (Infratil has a 48% stake) performed solidly with proportionate earnings up 29% to A$159m. CDC has doubled total future capacity and is accelerating development. The business expects to sign 300mw worth of contracts before Xmas with another 100mw expected to progress in the new year. CDC is winning contacts from “hyperscale” customers such as Microsoft and Amazon.

Looking ahead Infratil reduced its full-year proportionate earnings guidance to $960m-$1.00b. There is an expectation that Longroad (in which Infratil has a 37.3% stake) may face some headwinds under a Trump Administration given the potential change to the Inflation Reduction Act as it relates to tax credits for renewable energy along with pro-tariff policies.

Nonetheless a strong result from CDC and better than expected numbers from One NZ overshone the risks around LongRoad. Infratil shares rose 0.8%.

Shares in Sky Network Television pushed 3.9% higher. The pay TV operator affirmed earnings guidance, and is on track for an FY25 dividend of at least 21 cents per share. Advertising revenues softened but this is a very small part of the business, with revenues here close to zero a couple of years ago. Encouragingly, the company continues to work towards the resolution of contract negotiations with NZ Rugby.

On the data side there was some good news on the inflation front. Monthly food prices fell 0.9% in October compared with September. The largest contributor to the fall was vegetables, down 7.2%. This is good news for cost-of-living challenged kiwis in that the cost of part of the “5-a day” bundle has declined - vegetable prices have fallen 14.2% over the past two years although fruit prices are up by 8%.

On an annual basis the outcome was better than expected. Food price inflation in the 12 months to October was 1.2% against expectations for a 1.5% lift. Prices for restaurant meals and ready-to-eat food rose, but the pace of gains eased. Grocery food prices also rose on an annual basis, propelled by higher prices for olive oil, butter, and standard two litre milk. The annual rise was 2.5%. A 500g block of butter now costs over one-third more than it did last year. The price for a standard two litre bottle of milk increased around 9% over the same period. Rising International dairy prices are good news for farmers and the New Zealand economy as a whole, but are also being worn by local consumers.

There was good news elsewhere on another area of inflation which has been quite sticky – rents. On a “flow” basis these rose just 0.1% for the month and 0.7% for the year. Petrol prices have deflated 14% in the year to October. Domestic airfares were up 2.4%, but international prices descended 2.8%.

The REINZ October report suggested a rosy picture of the housing market, titled “Spring Sales Surge Around the Country.” The headline numbers look good but when seasonally adjusted there has been no real seismic shift. Sales rose 10% from September to October, but seasonally adjusted were down 2.6%. The House Price Index was up 0.5% in October. On an annual basis, NZ house prices are down 1.1%, while Auckland and Wellington are down 3% and 2% respectively. Christchurch is up 2.9%.

Australia

The Aussie market was higher on Thursday, with the ASX200 gaining 0.37% to 8,224. The miners were lower (BHP eased 1.3%), but the banks were in demand, led by CBA which rose 1.3%.

The technology sector stood out, with Xero soaring 5.9% as the accounting software company reported a 51% increase in half year earnings (EBITDA) to $311.7 million. Revenues jumped 25% to $995.9b. Stripping out the removal of “idle” accounts, subscriber additions were 186,000 and the average revenue per user jumped 15% to $43.08.

Three were plenty of announcements in the agri sector. Shares in crop protection company Nufarm rallied 6% despite a 29% decline in FY24 underlying earnings (EBITDA) to A$313 million. Management expect active-ingredient prices for crop-protection products will stabilise into FY25. Graincorp shares fell 2.9% as the grain handler reduced its special dividend as net profit fell to A$62 million in FY24 from A$250 million the prior year. Shares in chemical and explosives manufacturer Orica were flat as the company announced a 15% rise in FY24 earnings (EBIT) to A$806 million. Digital blasting technologies have been in demand.

On the M&A front, Cleanaway has announced that the regulator has raised competition concerns around its proposed takeover of City of Melbourne council-owned waste business Citywide. The shares rose 3.3%. Macquarie Group has reportedly sold its three British airports (Southampton, Glasgow and Aberdeen) to a Canadian pension fund for £1.53 billion, a gain of almost 50% on what it and co-owner Ferrovial paid a decade ago.

On the data front, the Australian unemployment rate held at 4.1% in October. The economy added 15,900 jobs, below estimates for around 25,000 and down from a 64,100 gain the previous month. The RBA though still looks set to bide its time with rate cuts.

Away from markets, it was great to attend the Combined Community Trusts Conference this week with lots of great speakers and discussions. Impact was a big theme. Invercargill was looking great. The Bill Richardson Transport Museum is something to behold and the Velodrome is well worth a visit. Onto the weekend “Allez” the AB’s!

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