Devon Funds Morning Note - 16 May 2025

Friday 16th May 2025

Cinderella

Global

The S&P500 remained on the front foot, rising for a fourth day, continuing the rally that has occurred in the wake of the US/China trade truce. Sentiment was also boosted by US retail sales edging up last month, and a much lower-than-expected wholesale inflation print for April, producer prices fell 0.5% when they had been expected to gain 0.3% month over month. Tariffs are yet to have a meaningful impact on inflation, but retailers are prepping for the impact. After reporting better-than-expected earnings, Walmart’s management warned of tariff-linked price hikes. A still uncertain outlook has meanwhile not deterred (but perhaps promoted) corporate activity in the retail space – Foot Locker soared 88% after agreeing a US$2.4billion takeover by US focussed Dick’s Sporting Goods. In commodities, oil prices dipped as Trump said the US was getting close to securing a nuclear deal with Iran, a comment which was supported by officials from the country.

The S&P500 jumped 0.4%, while the Dow Jones rose 0.7% as networking giant Cisco rallied nearly 5% on an earnings beat. The Nasdaq eased 0.2%. Apple was 0.4% lower as Donald Trump said he had “a little problem with CEO Tim Cook”, telling him yesterday, “I don’t want you building in India.” Apple has committed US$500 billion to investment in the US but has also been ramping up production in India, aiming to make around 25% of global iPhones in the country (currently 10-15%) in the next few years as it looks to reduce reliance on China. Apple has secured exemptions from Trump’s reciprocal tariffs, but will also be aware that officials have warned these could be temporary. Apple may need to “try harder”, it seems.

There is a clear theme of “reciprocation” which is helping investor sentiment. It started with the US and China agreeing to reduce tariffs at the start of the week and has continued during Trump’s visit to the Gulf States. The Qatar Investment Authority has also revealed that it plans to invest an additional US$500 billion in the US over the next decade, targeting areas such as AI, data centres and healthcare. The amount accounts for a large chunk of the total US$1.2 trillion economic pledge by Qatar during Trump’s visit this week.

Investors have also been encouraged that, notwithstanding the uncertainty around the future, inflation in the here and now is moderating. The producer price index for April declined 0.5% month-over-month, as prices for services fell 0.7%, the most in at least the past 16 years. Excluding food and energy, core PPI declined 0.4%, also better than an estimate for a 0.3% increase. The print will be welcomed by the Fed, although Jerome Powell poured some cold water on the magnitude of future rate cuts, highlighting the challenges of a period with “more frequent, and potentially more persistent, supply shocks.” Donald Trump won’t be too happy to hear this.

Price inflation is moderating, and the consumer is also holding together, it seems. Retail sales increased 0.1% in April, down from the 1.7% jump in March ahead of the tariffs, but in line with estimates. Restaurants and bars saw a 1.2% increase. The US consumer is still resilient, it seems, but the manufacturing sector is still cautious over the outlook. The Empire State Manufacturing index (for the New York region) eased to -9.2 (negative means more firms are contracting than expanding activity), while the Philadelphia Fed manufacturing index rose sharply from -26.4, but is still negative at -4.0.

Also braced over the outlook is the world’s largest retailer, Walmart. Management said at the earnings call that consumers could start to see higher prices as early as later this month. The company’s CFO said that even with the lower duties on imports from China to 30% for 90 days, tariffs were “still too high” and impossible to completely absorb for a retailer “wired for everyday low prices.” Walmart shares decreased 0.5% after missing on sales estimates for the first time since February 2020, reporting a 2.5% increase in revenues to US$161.51 billion. Net income fell US$700m to US$4.49 billion. US same-store sales though, rose 4.5%, and e-commerce sales soared over 20%, making for the first profitable quarter for its online business.

A takeover deal announced in the retail sector, meanwhile, may have a number of drivers. Dick’s Sporting Goods has agreed to buy Foot Locker in a US$2.4 billion deal. Dick's is the largest sports retail chain in the U.S. but it doesn’t have the global “footprint” of Foot Locker which has 2,400 stores across 20 countries. Perhaps management at Dick’s are also front footing the benefits of being more globally diverse given recent trade developments, and some questions over the US economic outlook.

Elsewhere, shares of UnitedHealth Group fell 11%. It has been reported that the Department of Justice is carrying out a criminal investigation into the health-care giant over possible Medicare fraud. The news comes following the recent sudden exit of the company’s CEO. The company has had more than a few issues, and has lost over US$300 billion of its US$600 billion market cap since cutting profit forecasts last month. Also dealing with some internal issues is Coinbase –shares in the digital currency platform fell 7% after it said a hacker bribed staff to steal customer data - the hackers are now demanding US$20 million in ransom.

Across the Atlantic, the STOXX50 rose 0.2%. Industrial production unexpectedly soared 2.6% in the Eurozone in March, boosted by strong demand from the US and a resurgent Germany, which rallied 3.1%, reversing a 0.5% decline seen in March. The sector’s improved performance helped support GDP, which grew 0.3% in the first quarter, albeit below estimates for 0.4% growth. The lift in industrial production was likely driven by US companies frontloading Eurozone products ahead of Donald Trump’s tariff regime. There was a great comment from one economist that it had been a “Cinderella” moment for EU manufacturing, which could “turn to rags” post the clock striking Liberation Day. Time will tell, and as we await any news on a US/Europe trade deal. Cinderella may yet go to the ball again.

Providing a further tonic for the European economy might be a big push on defence spending. The sector rallied on Thursday as Germany’s defence minister said he backed Donald Trump’s call for NATO members to commit 5% of their GDP to security spending.

There were lots of company results out in Europe. German engineering group Siemens (+3%) beat on sales and earnings estimates, but management noted that prices are increasing on some goods due to U.S. tariffs. German insurer Allianz (-1%) posted record operating profit for the first quarter of the year, and confirmed full-year guidance, citing strong performance in its life/health division. Industrial giant Thyssenkrupp fell 12% after reporting a 6% year-on-year drop in orders in its fiscal second quarter, due to ‘market conditions”, while sales were down 5% from the previous year. Earnings (EBIT) fell 90% year-on-year to €19 million.

Deutsche Telekom rose 2.6% after reporting a 6.5% year-on-year rise in first quarter net revenue. Merck fell 7% as the German pharmaceutical firm cut its full-year outlook amid macroeconomic and geopolitical uncertainty and foreign-exchange headwinds. Shares in French game developer Ubisoft tumbled 19% after the company behind the popular “Assassin’s Creed” game franchise reported a 20.5% drop in net bookings for FY25.

In the UK, the FTSE100 rose 0.6%. Shares in insurer Aviva rose 2.2% as the company reaffirmed its financial targets after reporting a 9% annual jump in general insurance premiums in the first quarter to £2.9 billion. Also bounding back is the UK economy, which grew an impressive 0.7% in the first quarter. Again, time will tell if this is just a Cinderella moment. The US/UK trade deal is a positive, but negotiations with Europe are dragging on. An EU official said overnight that talks with the U.K. are moving at a “very slow pace” and have met “two major stumbling blocks.” EU and U.K. representatives meet for a summit on resetting post-Brexit relations next week, with trade, aid and defence on the table.

In Asia, the Nikkei retreated 1%, and the Hang Seng was 0.8% lower. Alibaba shares have fallen 8% on their US listing after the Chinese e-commerce giant missed earnings expectations for its fiscal fourth quarter on both the top and bottom line. Investors were hoping the company’s investments in AI and its core e-commerce business would help it hit or exceed high expectations. Alibaba has, though, been caught in the eye of the storm of recent (now paused) US/China trade frictions.

New Zealand

The Kiwi market was higher on Thursday, with the NZX50 gaining 0.8% to 12,880. Auckland Airport rose 1.3% after its traffic update, which showed weakness in domestic, but international held the line.

Fonterra also had a strong session, rising 1.3%. The pricing tailwinds for the dairy sector were highlighted by a release from Stats, which showed food prices increased 3.7% annually in April. Price increases for dairy were a key driver. Milk and cheese prices increased 15.1% and 24% respectively, in the 12 months to April 2025, while butter prices increased 65.3%. The average price for 500 grams of butter was $7.42 in April 2025, nearly $3 more expensive than this time last year. Dairy’s been a bright spot for the economy, it is also coming at a bit of a cost to Kiwi shoppers.

The select price indices data released yesterday also suggests that annual inflation is up into the high 2s. Electricity and gas were also included in the data for the first time and jumped by about $10 a month on average from April 1.

Another agribusiness doing well is Sanford, which rallied 3.4% to a 4.5-year high. The fishing company announced strong half-year results with revenue rising 3.6% to $286.0m. Net profit after tax of $34.0m was up 110.0%, and operating cash flow soared 500% to $49.6m. New management has had an immediate impact on the company, improving efficiency and taking costs out of the business. Results are somewhat flattered by the pull forward of salmon harvesting, as part of a test to see what the processing side can cope with and where the bottlenecks are. So H2 will be softer than otherwise because of this. Outside of that, improvement in margins is the result of many little/incremental improvements to processes that have all added up. Debt is also down substantially (net debt down 25% to $165m) from when the new CEO started. His goal is to reduce it to zero (given the cyclicality of the industry), and the board have pulled back the dividend a little to support this. The company is one year into a two-year turnaround.

Also looking to turn things around is Fletcher Building. The company has announced a restructure, which will see the Australian Division disestablished as a standalone division, with its operating businesses integrated into two new trans-Tasman divisions: Light Building Products and Heavy Building Materials. Fletcher Building’s other three divisions (Distribution, Construction and Residential & Development) remain unchanged. The cost savings from moving to product from geographical lines will be ~$15 million. The company had previously considered selling some of its Australian businesses, so this appears to mark a retreat from that notion and to target synergies through a more integrated structure.

Of note in the announcement was that the broader cost savings target for FY25, previously announced of ~$200m, remains in place. Even more notable however, was that Fletcher's has seen “no significant improvement in market conditions, with market volumes continuing to be challenging due to macroeconomic uncertainties and the lack of any material momentum in the recovery of New Zealand’s economy. Spending in commercial and infrastructure continues to be reduced or deferred. Residential property sales also remain at subdued levels. Yet again, another cyclical company crying out for more in the way of rate cuts to support the economy.

Australia

The Aussie market rose on Thursday, despite a very strong jobs report which could throw a spanner in the works for another rate cut by the RBA next week. The ASX200 rose 0.2% to 8,297. Mining was softer (BHP -0.7%) as iron ore prices eased, and energy was weak, but financials lifted. CBA jumped 1.2% to a record high. Australia’s largest lender delivered another strong result this week, but valuation seems to have been put to one side. CBA trades on 28 times earnings, around double what JPMorgan (the world’s biggest bank) trades at.

The technology sector also pushed higher, with Xero coming in with a very strong result. The stock rallied 4.7% after reporting a 30% lift in full-year after-tax profit to $227.8 million. Subscribers to the company’s financial software grew 6% in FY25 to reach 4.4 million globally. Management said the company hit its “rule of 40” target, where annual revenue growth and free cash flow margin should together surpass 40%.

Also charging higher was Graincorp, which jumped 9% after the grain handler upgraded its full-year earnings guidance following a strong east coast harvest. Insurance Australia Group jumped 5.7% after announcing the acquisition of The Royal Automobile Club of Western Australia for A$400 million. Treasury Wine Estates, though, fell 5.2% after announcing the CEO was stepping down after 5 years at the helm.

On the data front, the job release was very strong. Australian employment climbed 89,000 in April, following an increase of 32,200 the previous month, and trouncing estimates for 20,000 job additions. The unemployment rate held at 4.1%. It will be interesting to see what the RBA makes of this when it meets next week, especially given signs of de-escalation on the trade front.

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