Monthly Market Update
As at end April 2019
US profits beat street, but outlook dampened
Equity markets around the globe continued to rally over April with the MSCI World Index ($NZ) rising 5.9%. Notable trends over the month were the continued outperformance of developed markets over emerging, and the strength of the Euro and US dollar, particularly against the Kiwi. The NZ dollar’s general weakness over the month was precipitated by surprisingly weak inflation data following the announcement by the RBNZ that the next move in interest rates would likely be down.
The US corporate reporting season is in full swing and has beaten estimates so far. This has provided investors with the confidence to push shares back through 2018 highs (S&P 500 +4.0%). Whilst 77% of the companies that have reported so far have beaten market analyst estimates, tempering this positive trend are weaker profit outlooks many announced at the time of reporting. Fully 84% of the companies that have provided forecasts have guided that their numbers will be lower in 12 months. The average for the past five years is 70%.
While emerging market performances were mostly on the positive side of the ledger for the month, they lagged well behind major developed markets. Driving this relative underperformance was the general disappointment with the commentary coming out of the Chinese Central Bank (PBOC), that aggressive policy easings are no longer forthcoming. The reaction to the small change in the narrative highlighted just how high expectations were after years of accommodative monetary policy.
Commodity markets were flat to down over the month, with the exception of oil, which rose 7.2%. A strong greenback coupled with mixed inflation reports kept investor enthusiasm toward commodity markets and commodity-based economies subdued.
NEW ZEALAND MARKETS
Your a2 gains won’t be taxed
New Zealand equities continued their positive start to the year as the S&P/NZX 50 Index returned 1.7% in April, taking year to date returns to 13.6%. The Index return was again heavily influenced by a2 Milk (ATM), which makes up close to 12% of the local bourse, returning 17.2%. The announcement by the government they would not implement a capital gains tax (CGT) and not campaign for one in the future was received positively by investors and businesses alike.
It was also a very good month for New Zealand Tech companies with international exposure as Gentrack and Pushpay both had double-digit returns and the latter ending as the top performing company in the Index returning 17.8% on no major news flows. The worst performer in the Index was Summerset (SUM), returning -15.0% after reporting weaker than expected first quarter sales numbers. Fears that some issues raised in the SUM result, such as increased days to settle, were not company specific, caused sector peers (Metlifecare, Oceania and Ryman Healthcare) to decline sharply. However, the sector did experience a good bounce later in the month thanks to the CGT announcement.
Lithium mood fails to stabilise
The Australian market continued its positive run, with the S&P/ASX 200 delivering a 2.4% return for April. The strongest performing sectors were Consumer Staples and IT, both delivering returns of 7.3%; whilst Property (-2.6%) and Materials (-2.0%) dragged on the index.
Corporate activity was a common theme among the best performers, with car dealer Automotive Holdings (+37.1%), Dulux (31.8%), and Crown Resorts (+15.5%) all attracting takeover bids in April – the latter, pitched by Vegas-based Wynn, was rescinded shortly afterward. Conversely, issues with monetisation was the overall theme for the two worst performers (both Lithium companies). Pilbara Minerals declined 22.8% despite declaring commercial production as deal prospects faded, and Galaxy fell 22.3% on an ill-received update regarding JV efforts in Argentina.
On the macroeconomic side, first quarter CPI came in at 0.0% (vs 0.2% expected) with cheaper fuel, travel, and accommodation offsetting rises in food, healthcare, and education. March employment data was also better than expectations, with a small uptick in the unemployment rate to 5.0% due to increasing participation. Given proximity to the May 18th election and inconclusive recent data, markets are pricing in a 40% chance of an interest rate cut at the next RBA meeting.
Inflation goes AWOL
Global bond markets delivered mixed results in April with bond yields slightly up in most regions. There has been a more positive tone to recent economic data releases, with signs of stabilisation in manufacturing surveys in some regions, and better than expected employment data from the US. However, the outlook for global economic growth remains subdued and most Central banks are in data-watching mode. Current bond yields imply slightly lower interest rates for the US, New Zealand and Australia; and there is potential for deeper cuts if the environment deteriorates.
In New Zealand, the S&P Corporate Bond Index was flat for the month, outperforming the S&P NZX Government Bond Index, which was down by 0.3%. Both indices have had strong returns over the last few months in response to lower government bond yields.
Current market pricing implies an OCR of 1.3% at the end of 2019, showing that there is the expectation of at least one cut by the RBNZ this year. This expectation has been reinforced by weaker than expected inflation data released this month. The annual CPI growth to March was 1.5%, and this number has been falling over the last 2 quarters. A similar trend has been seen in Australia which also recorded a weaker than expected annual CPI growth rate of 1.3% to March. Some of this can be explained by the lagged impact of lower oil prices (which have since recovered) but economic momentum is also softening. In New Zealand, this is most evident in weak business confidence, with both ANZ and NZIER surveys released this month continuing to highlight net expectations of deterioration in general economic conditions.