Monthly Market Update
As at end December 2019
Record finish for the decade
Global sharemarkets continued their rally into the final month of the year. However, the NZ dollar also caught the attention of the bulls and rallied strongly against all the major currencies. Owing to the Kiwi’s strength, the MSCI World Index posted a -2.0% return for the month in NZD terms. On the same basis, the index was up 26.9% for 2019, driven primarily by another stellar year for US stocks. The broad-based S&P 500 index and the technology focused Nasdaq index were up 31.5% and 36.7% respectively in USD terms for 2019 - their best performance since 2013. Gold also saw strong price appreciation as it rose 18%, its best year since 2010. In contrast to its equity markets, signals from key US macroeconomic releases were mixed. Whilst closely-watched payroll numbers trounced expectations, the ISM PMI index indicated that US manufacturing was still struggling.
European markets finished the year in a relatively optimistic mood. After Boris Johnson’s Conservative Party’s resounding election victory, investors are more confident it will be smooth sailing for Brexit. Improvements in leading economic data, including German, French, and Italian PMI levels, reinforced the view that European conditions are beginning to recover. Further adding to improving investor sentiment was the announcement that US and China will sign ‘Phase One’ of their new trade deal, this is expected to occur sometime in mid-January.
NEW ZEALAND MARKETS
Another likely NZX retirement
The New Zealand share market had a strong December with the S&P NZX 50 rising by 1.6% and posting a remarkable 30.4% return for the year. Whilst year-end is usually a quiet period for markets, this December was an unusually eventful one, with corporate activity and several notable announcements.
The strongest performing stock was Oceania Healthcare, which returned 22% despite no specific news. The performance was on the back of a takeover offer for fellow retirement village and aged care provider Metlifecare; and also helped lift Arvida Group, Summerset Group, and Ryman Healthcare. If the transaction proceeds, it would be yet another delisting from the NZX, adding to the growing list of departures over the last couple of years. On the other side of the ledger, two of the worst performing stocks, Z Energy and NZ Refining, were both impacted by a drop in oil refining margins, with a decline in retail fuel margins a further dampener for Z Energy. Sky Network Television got the wooden spoon for the month, dropping by 16.5% to finish the year down 59%.
On the corporate activity front, Restaurant Brands and Pushpay announced acquisitions in the US while Vista Group increased its stake in Vista China. Tilt Renewables sold its Snowtown 2 wind farm in Australia, and Spark sold Lightbox, its subscription video business, to Sky Network Television. It was also a busy month for leadership shuffles, with announcements Trustpower CEO Vince Haskworth would depart to take the helm at Mercury Energy, and acting Air New Zealand CFO Stephen Deschamps is switching to Freightways. A2 Milk CEO Jayne Hrdlicka and Gentrack CFO Tim Bluett also unexpectedly resigned, which raised eyebrows given their relatively short tenures.
December to remember or forget?
After a solid run in November, the S&P ASX200 index backtracked in December, returning -2.2%. Despite this, the index still delivered a 23.4% return for 2019, its strongest year over the decade. Materials and Utilities were the strongest sectors this month, eking out small positive returns; whilst Consumer Staples and Telecommunications were the weakest, returning -8.1% and -5.8% respectively.
The best performers in the index were mid-tier Gold miners: Silver Lake (+20.7%), Gold Road (+18.6%), and Northern Star (+17.9%). On the flipside, online lottery platform Jumbo (-27.3%) and salary packager Smartgroup (-23.3%) fared worst. Jumbo fell on a trading update which guided to growth rates below market expectations, whilst Smartgroup was marked down after indicating contract changes would adversely impact its profit from selling insurance.
Macroeconomic news was largely muted, with the RBA holding interest rates at 0.75%, and third quarter GDP growth of 1.7% in line with expectations. Looking forward into 2020 as the social and environmental impacts of once-in-a-generation bushfires continue to be felt, a further focus will become the followon economic impacts and policy response to these challenges.
It was another month of rising government bond yields and negative returns for global bond markets with the Bloomberg Barclays Global Aggregate Bond Index (NZD hedged) falling by 0.2%. Within this, there has been considerable divergence across regions and sectors, with corporate bonds and high yield markets outperforming strongly. Investor sentiment on risk assets has become more positive following progress on US- China trade talks and the outcome of the UK election, contributing to significant reductions in risk premiums. As an example, the Bloomberg Barclays US Corporate High Yield Index returned 2% for the month, and is up an astonishing 14.3% for 2019. The yield on this index has fallen from 8.0% to 5.1% over the year, with its premium to government bonds narrowing to just 3.4%. For context, this index is comprised of ‘junk’ bonds which lack investment grade credit ratings and have much higher risk of default versus government bonds. In New Zealand there has been a sharper rise in government bond yields which has had more of an impact on local bond markets. The S&P NZX Government Bond Index fell by 1.9% for the month and is now down 2.9% over the last 3 months. Aside from the improving global outlook there has also been a significant shift in domestic conditions, with improving business and consumer confidence, a rebound in residential property markets, continued low unemployment, and announcements of increased government spending.
December also saw the final release of the RBNZ’s bank capital review. As expected, the banking sector is going to be required to hold significantly more capital, albeit there has been some give versus the initial proposal in terms of a longer implementation timeframe and on types of capital that will qualify. That said, the requirements are still onerous by international standards, reflecting the size of the NZ economy and concentration within the banking sector.