Monthly Market Update
As at end November 2019
Punchbowl prolongs party
A broad-based rally in US stocks propelled the MSCI World (NZD) Index up 2.7% in November. US Technology stocks were particularly strong performers with the tech-heavy NASDAQ up 4.5%. European stocks also put in a good performance with the STOXX50 Index rising 2.8%. Elsewhere, performance was mixed, with emerging market economies heavily exposed to trading with China faring the worst.
The strength of equity markets this year, particularly in developed markets, has continued to puzzle many investors and commentators. This is at a time when almost all economies have been slowing, which is generally not a backdrop conducive to buoyant markets. Rather, the confidence and strength underlying markets is coming from two principle areas. The first is central banks in almost every country continue to lower interest rates, and in the largest economies (Europe, Japan and the USA), they have also been pumping vast amounts of liquidity into the financial system and adding new rounds of Quantitative Easing (QE). The other reason is announcements on new large fiscal stimulus are becoming more frequent. In Germany, a left-wing victory during the month within the ruling coalition is likely to see a long awaited shift from fiscal conservatism to a major ramp-up in government spending. Over in Japan, Prime Minister Abe is close to announcing a NZ$90 billion stimulus package; while the month ended with even NZ announcing its own $400m infrastructure program.
News coming out of China finally started looking a little better with the important manufacturing PMI index lifting several ticks to post an expansionary reading, the first since March, while the smaller services sector index jumped to a 7 month high. However, improvement has not been felt by its smaller trading partners such as Korea, Philippines, Thailand and Indonesia who all posted weaker economic data.
NEW ZEALAND MARKETS
Healthy November for NZ market
The New Zealand sharemarket had a strong finish to November, dominated by the healthcare sector as the S&P/NZX 50 Index returned 4.9% for the month. The Index is now up 28.4% year to date, well ahead of most global peers.
Aged care providers led the charge with Metlifecare (+21.2%) being the top performer on the back of an announcement that it had received an offer to acquire the company. The proposed deal is still conditional and the board has stated that the offer price is below their expectations of value for the company. Summerset (+17.0%) and Ryman Healthcare (+17.0%) were not far behind with the former getting approval to build a proposed retirement village in Auckland’s St. Johns, and the latter benefiting from a positive reaction to its interim results.
One healthcare company that did not follow the trend was Ebos, which returned -7.5% after the company’s largest shareholder sold 15m shares to institutional investors at a significant discount. The worst performer was Gentrack, after the company downgraded its FY19 earnings guidance for the second time in three months. The company has recently seen a material increase in bad debts in the UK, partly caused by the introduction of an energy price cap, which saw many of Gentrack’s customers either being acquired or go out of business.
Laundering doesn’t wash
November saw the S&P/ASX 200 Index return 3.3% and close at an all-time high, eclipsing the previous record set in July. Prior to this, the last time the index traded at these levels was in November 2007.
IT and Healthcare were the strongest sectors, returning 11.0% and 8.9% respectively, whilst Banks got short shrift, with a -3.7% return on the back of a scandal at Westpac. Australia’s second largest bank returned -9.4% and lost its CEO, Brian Hartzer, after anti-money laundering regulator AUSTRAC brought proceedings against it over reporting failures. Childcare operator G8 Education took the mantle for worst performer, returning -23.5% on a weak trading update and asset sale announcement.
At the opposite end were mining services business NRW and fuel refiner Caltex, returning +33.7% and +26.7% respectively. Both moves were driven by corporate activity, with NRW announcing a material acquisition, and Caltex receiving a takeover proposal. Virgin Money UK also continued its strong run, with a +29.3% return for the month.
Messages were mixed on the macroeconomic front. Whilst the trade surplus came in at $7.2bn (over $2bn better than expected), September retail sales were sluggish (+0.2% vs +0.4% expected) and unemployment ticked up to 5.3% from 5.2%. This month, the RBA limelight was less on its interest rate decision (held at 0.75%), and more on a speech by Governor Lowe which laid out the RBA’s thinking on unconventional policies such as negative interest rates and ‘QE.’ The message was that the QE option would only be on the table if rates fell further to 0.25%, and then likely be limited to government bonds.
Interest rates on hold for now
Bond yields were higher across most developed economies in November, which has resulted in negative returns for global bond markets. The Bloomberg Barclays Global Aggregate Bond Index (NZD hedged) was down 0.2% and is now down 1.0% over the last 3 months. However, this does need to be put into context against the strong 12-month return of 9.3% and the significant falls in bond yields over this period. New Zealand bond market indices have done slightly better than the global aggregate this month, with the S&P NZX Corporate Bond Index falling by 0.1%, while the S&P NZX Government Bond Index was flat. However, both of these indices have not performed as strongly on a 12-month view with returns of 6.9% and 8.0% respectively.
The RBNZ elected to keep the OCR unchanged at 1% at its November meeting citing little change in economic developments since its last meeting in August. The bank still expects to keep interest rates low for an extended period of time and maintained its stance that further monetary stimulus will be forthcoming if required. These comments are very similar to what has come out from the RBA, which also kept its cash rate on hold at 0.75% at its December meeting. In both New Zealand and Australia, there has been a shift in market expectations of future interest rate cuts with shorterterm bond yields rising over the last few weeks. While it would be a bold call to suggest interest rates have bottomed at this point, we do note that downside risks have been de-emphasised by both the RBNZ and RBA, and both banks have highlighted that their current stance is stimulatory. We see the outlook as more balanced than it has been for some time.