Monthly Market Update
As at end January 2019
Global stocks make a comeback.
Global equities made a strong start to 2019 from what was a very dire finish last year as the MSCI World Index (NZD) returned 4.2% for the month. Despite geopolitical uncertainty and increasing concerns over global growth continuing, it was the shift in rhetoric by the US Federal Reserve (Fed) that lifted sentiment and appetite for risk.
One of the major drivers for the strong performance this month was the unexpected shift in the Fed’s policy stance. Rather than continuing to reiterate “gradual increases” in interest rates, the Fed softened its tone. It highlighted it would be more “patient” about further rate hikes and that it could also revise its balance sheet normalisation program amid economic and financial developments.
The US corporate reporting season started on a good note, providing a strong tailwind for equities. Of the companies that reported, more than 64% surprised positively and exceeded analysts’ earnings expectations. However, a number of high profile and industry leading corporates such as Caterpillar, Intel and Apple issued downgrades after highlighting challenging trading conditions, particularly in China. A global economic environment showing signs of being less conducive to growth has been a key theme concerning investors.
The International Monetary Fund (IMF) has cut its projected global growth rate from 3.7% to 3.5%, driven primarily by weakness in Europe due to softening consumer demand and manufacturing in Germany. Outside of Europe, the IMF cited global trade policy uncertainty, a no-deal Brexit and continued slowing of the Chinese economy as key threats.
NEW ZEALAND MARKET
A solid start, but lagging peers.
A solid start to 2019 for New Zealand equities, with the S&P/NZX 50 Index chalking up a 2.0% return for January. The index return lagged developed world counterparts (e.g. S&P 500 +8.0%), giving back some of December’s relative out-performance. There was another incrementally positive data point on business confidence from the NZIER; with pessimistic responses on general conditions moderating from 28% in the September quarter to 18% in December. For the rolling year to November new dwelling consents were up 5.3% on a year earlier, with almost 32,800 consents. This comes as house prices, as per QV data, continue to strengthen in most major centres, except Auckland where prices fell 0.4% year-on-year in December.
A2 Milk (ATM) and Pushpay (PPH) were the standout performers, returning 13.5% and 12.1% respectively. PPH lifted on a positive update highlighting strong momentum and achieving cash-flow breakeven. ATM’s momentum continued after strong port data on export volumes came in as expected. The milk producer, which constitutes nearly 10% of the S&P/ NZX 50, was again the biggest positive contributor to performance. The two worst performers were both on the back of negative updates, Kathmandu -12.8% on weaker than expected same-store sales during their key holiday trading period; and Air New Zealand -9.4% in the wake of a profit downgrade on subdued forward booking trends.
Where to from here for banks?
Following the global-led rally, the Australian share market also had a strong month with the S&P/ASX200 Index returning 3.9%. There was a reasonable amount of stock-specific volatility as we approach February’s reporting season, and a number of corporates released preliminary results or updated the market regarding their guidance or forecasts.
Over the month, the top performing sector was Energy (+11.5%) and the worst was Financials (-0.2%). The Energy sector rose on the back of strong commodity markets where oil, in particular, saw a sharp bounce. The WTI per barrel price rose 18.5%, on concerns over political tensions in Venezuela and global production cuts.
Financials performed poorly due to a number of significant downgrades notably, by Challenger and AMP, which declined 23.7% and 7.8% respectively. Additionally, weak sentiment continued to weigh upon financial stocks as Hayne’s final report on the Royal Commission Inquiry, released in early February, was expected to contain substantial recommendations on improving the troubled sector.
Other notable announcements included ResMed’s (-17.9%) quarterly update where global sales came in below expectations and Wesfarmers (0.0%) announcing weaker trading conditions across its Kmart and Target department stores. The Australian housing market continues to worsen and dominate headlines, with property prices recording another fall. The National CoreLogic dwelling prices fell 1% in January with the year-on-year decline coming in at -5.6%.
NZ bonds deliver positive returns, but underperformed global markets.
The start of 2019 was a positive one, not just for bonds but for most other asset classes as well. Government bond yields fell across most markets due to weaker economic data, which has led to a shift in monetary policy expectations. The narrative for the majority of 2018 was one of tighter monetary policy, led by the US and Canada but expected to be followed by Europe and possibly even Japan. Market expectations started to shift in November and global bond yields have been on a steady downward slope ever since. Based on market pricing of shorter term US government securities, the probability of a Fed interest rate cut over the next 12 months is now actually slightly higher than a hike.
New Zealand bond markets underperformed global markets but still delivered positive returns, with the S&P NZX Corporate Bond Index and S&P NZX Government Bond Index both returning 0.6%. The positive pricing impetus of falling yields was more apparent for longer dated maturities in both bond classes. A global tightening in credit spreads also benefited some corporate bonds in New Zealand, however this impact was relatively minor due to the conservative composition of local bond indices.
On the government side, S&P upgraded the New Zealand Sovereign from ‘Stable’ to ‘Positive’ on an improving fiscal balance. Inflation data released this month was slightly lower than the RBNZ forecast, with CPI increasing by only 0.1% in the December quarter, whilst the annual figure of +1.9% was stable and in-line with expectations. We do not think this release will change the RBNZ’s outlook. Our current view is that the OCR is likely to remain unchanged throughout 2019. However, a move in either direction is certainly possible and the RBNZ have indicated a willingness to react if market conditions change.