Investment Matters

What Matters this week: Interest rates, oil and mixed company news

It was a quiet week, post budget and reporting season, with AGMs providing the chief source of what little company news flowed. Yawn from equity markets.

What really mattered this week was interest rates, and of the US kind. On Tuesday the US 10 year government bond rate jumped back above 3% and feels like it is consolidating above this phsycological level (currently at 3.1%). This is the highest level since 2011.

Furthermore, at the shorter end of the 'curve' the news was full of interesting tid bits, such as the US 2 year bond rate reaching its highest level against German bonds in 30 years (the 1980’s) and the US 3 month bond rate being above the dividend yield of the US S&P 500 for the first time since 2008. Interest rates have a real effect on economies, and US rates in particular on global economics. Time will tell what all this means, but generally higher rates are like putting your foot on the brakes of your car, it tends to slow down! Same with economies…

In the same vein another historical global growth villain is the Crude Oil price, which reached its highest level since 2014, as shrinking US oil, gasoline and diesel stockpiles signalled tighter supplies. Whilst historically a higher oil price has been a key contributor to slower growth, in recent years (the post-GFC oil bull market) the actual impact on growth was more muted.  Still, people have less to spend on other things when the price of petrol is higher. Not helpful.

Coca Cola Amatil (CCA) had its AGM on Wednesday and announced the retirement of Catherine Brenner (the recently departed Chair of AMP) after a decade on the Board.  The business provided mixed messages on 2018 financial performance with New Zealand and Fiji performing ahead of expectations but PNG and Indonesia off to a subdued start. Not much was offered on Australian performance, however, it did note that it is experiencing a negative impact from the new container-deposit schemes. Tough times to be a reseller of sugar, in liquid form…

The biggest clunk this week came from Telstra. On Tuesday it announced that it now expects profits for FY-18 at the bottom end of its expected and previously announced range. It also expects “challenging conditions” to extend into 2019.  This swiftly pushed shares to below $3 for the first time since 2012 and heading swiftly towards the all-time low price set in September 2010 of $2.62 (currently $2.86). Given increasing competition, the need to spend large sums on keeping up with technology (5G) and an incredible ability to underwhelm its customers (a personal comment!) it is not surprising that analysts quickly floated the idea that TLS will need to (and should) lower its dividend again.

In positive news, A2 Milk announced that revenue for the 9 months to end-March were up +70% on PCP at NZ$660m.  They are now expecting full year revenue of $900-920m. This is a terrific rate of growth for company which has leapt up the market, however, in a telling sign, the stock closed down -13.1% on the day of release, as the market had been expecting full-year revenue of $960m. Damn expectations.

Paints' maker Dulux Group announced a 1H profit up 9% on the prior year. In a good sign it expects its Merrifield factory to reach full output in the 2H and for overall market growth to continue. That said it was having to work hard to absorb higher prices for raw materials, like titanium dioxide and latex whose prices were rising well above the rate of inflation. A rising oil price won’t help this.