Monthly Market Update
As at end March 2019
Weak data a counter intuitive fix for risk assets
Global equity markets posted a solid performance for the month despite weakening economic data. The benchmark MSCI World Total Return Index (NZD) rose 1.2%, and the weaker outlook set off a strong rally in most bond markets. The bond market rally was interpreted positively by equity investors on the rationale that the weaker outlook would result in easier monetary policy from data-driven Central Banks, and therein more liquidity to drive risk assets.
The US Federal Reserve, the only major Central Bank that has been lifting interest rates, pivoted to a more dovish stance. It trimmed its GDP growth forecasts and retracted not one, but both projected rate hikes for this year. With mixed earning results, there are also signs that US corporates are beginning to feel the effects of a slowing economy. Examples included consumer demand bellwether Nike’s miss on North American revenues, and FedEx cutting its full-year outlook again alongside a 19% decline in year-on-year earnings.
In terms of economic announcements, the month concluded on a positive note. The Chinese manufacturing PMI (an important leading indicator) came in significantly above expectations at a level suggesting this sector of the economy expanding again. Given the considerable monetary and fiscal stimulus over the past year, this will no doubt please authorities. The stimulus also helped drive a sharp rebound in sentiment across all asset classes, adding to the feeling that stability and confidence in the overall growth picture may be returning.
NEW ZEALAND MARKETS
Markets soar, as the OCR stays grounded
New Zealand equities had a stellar end to the first quarter as the S&P/NZX 50 Index returned 5.6% for March, rounding out the quarter at 11.7%. This result was partly on a strong last inning in late March after the RBNZ unexpectedly shifted towards an easing bias, stating that the direction of the next Official Cash Rate (OCR) move is more likely to be down.
March was a great month for Gentailers with Meridian Energy (MEL) the top performing company in the Index, returning 16.1%, whilst Genesis Energy (GNE) and Contact Energy (CEN) returned 15.0% and 13.0% respectively. MEL reported another record NZ Energy Margin for February, while the sector in general continues to benefit from strong wholesale prices and a more benign interest rate environment.
The worst performer in the index was Kathmandu (KMD), returning -11.1%. KMD reported what initially appeared a solid result; however, the headline numbers benefited from inclusion of the newly acquired Oboz business, an adventure footwear company, which masked the impact of a weak Christmas trading period, particularly in New Zealand. This has resulted in a build-up of inventory that may put pressure on margins in the near term.
In brick veneer, on financed beds
The S&P ASX200 returned 0.7% for March, bringing its total quarterly return to 10.9%. At the sector level, monthly returns varied widely, with Real Estate (+6.2%) and Telecoms (+4.0%) the big outperformers, against the laggards Energy (-4.1%) and Banks (-3.8%).
Expectations of a more benign interest rate environment (which benefits property and inhibits banks) were evidently being priced in by the market. Best performers among large-caps were Fortescue (FMG, +17.3%) as iron ore prices remained elevated due to ongoing supply concerns in Brazil, and property group Charter Hall (CHC, +16.7%). Worst large-cap performers were AMP and conglomerate Soul Pattison (SOL), returning -11.0% and -10.6% respectively. Outside the top 100, fleet and leasing operator Eclipx fell spectacularly (ECX, -67.6%) on a dire profit and trading update, which culminated in the termination of its proposed merger with McMillan Shakespeare (MMS).
The clutch of macroeconomic data releases were broadly uninspiring; fourth quarter GDP came in at 0.2%, below expectations of 0.3%, and the headline unemployment rate improved slightly to 4.9%. Notably, the unemployment rate’s composition was less encouraging, as part time jobs rose at the expense of full time, and labour force participation declined. Sluggish growth and the ongoing slide in property prices are feeding through to expectations that the next move from the RBA will be a rate cut.
Housing remains in the limelight ahead of Australia’s upcoming general election in May, with the Labour Party undertaking to enshrine negative gearing and capital gains reforms if elected.
Inverted yield curves, a positive for bond markets
Government bond yields were lower across the globe which led to strong returns for fixed interest securities. The main reasons for this have been a reassessment of the outlook for US interest rates and a continuation of weaker global economic data, particularly in Europe.
Also playing a role was the ongoing uncertainty around Brexit and closure of a China-US trade deal. The Fed kept interest rates unchanged in March as expected, but watering-down both the speed and magnitude of its balance sheet tapering plans. The Fed now expects to stop reducing the size of its balance sheet in September and maintain this level for some time. This should put downward pressure on long term interest rates as the Fed will now be more actively buying more government bonds in the open market to replace those that are maturing.
The Fed also released an updated summary of economic projections from the Federal Reserve Board members. These forecasts showed both a decline in expectations for economic growth and also lower estimates for the target federal funds rate. The median estimate now implies no change in 2019 and only one hike in 2020, versus a steeper path for hikes previously.
In New Zealand and Australia there were similar trends of falling government bond yields leading to strong returns. Both New Zealand and Australia are also experiencing inverted yield curves for government bonds which is a reflection of market’s expectations for interest rate cuts. In New Zealand this became more likely following the RBNZ meeting in March. The OCR was left on hold at 1.75% but the language of the outlook statement was changed to state that next move in the OCR was more likely to be down than up. In response, the 10-year government bond yield fell from 2.2% at the start of the month to a low of 1.7% after the announcement. Unsurprisingly the S&P/NZX Government Bond Index outperformed the S&P/NZX Corporate Bond Index with a return of 1.9% versus 1.2%.