Monthly Market Update
As at end August 2019
Precious metals outshine markets
The MSCI World benchmark index rose 2.5% over August, primarily due to the NZ dollar (NZD) weakening against most major currencies. Most global markets were down in local currency terms, including the US market, with the S&P 500 Index falling 1.6%. What was evident over the month however, was the shift in sector performance with the defensive sectors being the top performers. These included Utilities +5.2%, Property +4.9% and Consumer Staples +1.8%.
The NZD saw a sharp drop after the Reserve Bank of New Zealand (RBNZ) surprised the market with a 50bp cut to the OCR, versus market expectations of 25bp. The NZD is considered a commodity currency and therefore is more sensitive to shifting sentiment concerning global economic cycles. This factor also weighed down the NZD as declining global growth and the intensifying trade war between US and China hampered risk appetite.
While economic data releases during August continue to point toward a slowing in the global economy, particularly in Europe and Asia, markets preferred to remain constructive and focused on rumoured government and central bank initiatives. This included Germany’s US$55bn fiscal stimulus plan as well as musings from the European Central Bank that it may well add equities to its QE buying programme, which is currently limited to bonds.
Commodity prices were under pressure during the month largely due to the firming US dollar and declining risk sentiment, with the exception of gold and silver. A number of investors are beginning to look through the current deflationary risks and are seeking to hedge what will follow. It is probable that some sort of debt monetization will be required to re-start the more debt laden economies, this scenario plays well for an investment in gold.
NEW ZEALAND MARKETS
Gentailers light up the boards
Whilst the earnings-reporting season saw some material movements from individual companies, general market movements were dominated by global trends (read trade war and yield curve). This saw the S&P/NZX 50 Index make its first negative monthly performance for the year, returning -0.9%. Headline business confidence from the ANZ New Zealand Business Outlook survey fell again in August to the lowest level since 2008. Employment, investment and export intentions all fell, along with profit expectations. This subdued outlook was echoed in some company updates over the month.
The weakening NZD was a welcomed tailwind for local companies with significant offshore revenues. One such company is Fisher & Paykel Healthcare (FPH, +0.9%). At its AGM, FPH mentioned the currency as playing a part in its upgraded FY20 profit and revenue guidance. The top performer in the Index was Kathmandu (KMD, +22.5%), which updated its FY19 profit guidance to approximately 10% above market expectations. Sales figures showed that strong performance from the Australian business more than made up for the weakness in NZ numbers. It was another electrifying month for the gentailers as Mercury NZ, Contact Energy and Meridian Energy returned 13.6%, 11.3% and 5.8% respectively on the back of strong earnings results and market demand for high dividend paying stocks.
Vista Group (VGL) was the worst performing company in the Index, returning -34.8% after the company materially downgraded revenue growth guidance for FY19 from 20% to 10-12%. VGL is still expecting healthy revenue growth from its core business segments (Cinema and Movio), guiding to 14 – 18% for the year. The a2 Milk Company (ATM) had a similar fate, returning -19.8%. ATM reported another strong, albeit slightly below expectations, revenue performance and guided to no growth in profit margins for next year. The company also announced it plans to exit its UK liquid milk operations to focus on the USA and China.
Some august results, others less respectable
The Australian market broke its 2019 trend of positive months, with the S&P/ASX 200 Index returning -2.4% for August, the month which saw most companies reporting their full-year results and setting the tone for the year ahead with outlook commentary. The notable drag on the Index was the Materials sector, returning -7.5%, and the top-performing sector was Healthcare with a +3.6% return.
Hair-trigger reactions were a common theme in this years’ results season. Several companies which had been lifted by zealous expectations were marked down heavily for disappointing; whilst others in the unpopular basket rallied on results not as bad as feared. Best performers were medical device maker Nanosonics and salary packager SmartGroup, which returned +21.1% and +22.0% respectively. Satellite communications group SpeedCast was the worst performer for the second month running. After a profit warning in July, it fell a further 58.9% in August on a weak result marred further by asset impairments.
On the macroeconomic data front, August was comparatively muted. The RBA’s cash rate remained unchanged after cut in July, and unemployment was stable at 5.2% as job growth was absorbed by higher participation. There were signs of life in the household sector with June retail sales up a betterthan- expected 0.4% on the prior month, and a lift in house price momentum for Sydney and Melbourne as borrowing conditions eased.
Orr moors the waka to global rates
“Challenges for monetary policy” was the theme at the annual Jackson Hole economic policy symposium this month, which was well attended by central bankers and academics from around the globe. One of the speakers was RBA governor Phillip Lowe, who highlighted the limitations of using monetary policy in the face of longer-term structural changes. He also spoke about the impact of political shocks and the flow on impact to business confidence. This theme became very relevant as tensions between US and China escalated further, with additional tariffs announced by both countries. In the UK, the deadline for striking a deal with the EU on Brexit is rapidly approaching and is proving to be a political landmine. Japan and Korea are also experiencing increased trade tensions and Italy is in the midst of structuring a new government following a collapse of the previous coalition. Yet another element to the mix has been the ongoing protest activity in Hong Kong, which has the potential to escalate further.
Against this backdrop, we experienced significant volatility in financial markets, which coincided with lower bond yields and strong returns for fixed interest markets. This month the Bloomberg Barclays Global Aggregate Bond index (NZD hedged) delivered 2.3%, which was its strongest monthly return since 2015. Local markets also did very well with the S&P/NZX Corporate Bond Index rising by 1.5% while the S&P/NZX Government Bond Index was up by 2.2%. Locally, interest rates were impacted by the RBNZ decision to reduce the OCR by 0.5% to a new all-time low of 1%, which was more than expected by the market. In an interview given by Adrian Orr at Jackson Hole, he cited the weak global environment as being a key factor in the RBNZ decision alongside lowering domestic inflation expectations. He described New Zealand interest rates as a ‘waka’ being tied to the global interest rate wharf, the implication being that further interest rate cuts will be necessary if global interest rates continue to fall.