Monthly Market Update
As at end October 2019
Middle Kingdom, middling growth
The MSCI World (NZD) Index edged up 0.3% for the month of October. Big moves in the US and Japanese sharemarkets were far more modest in size when translated back into NZ dollar terms due to the general weakness of the Greenback and Yen. Part of the Greenback’s recent weakness against the Kiwi and most other currencies has been due the convergence of monetary policy as the US Fed continues to lower interest rates, further reducing the attractiveness of US deposits.
As expected, the Fed cut rates again by 25 basis points to 1.75% during the month. While they gave no indication that they are finished cutting, they did not signal another rate cut anytime soon. Recent positive data on the economy is clearly influencing their thinking. The 3rd quarter GDP growth came in at a respectable 1.9% year on year and within that, the all-important consumer component was particularly healthy, growing at 3%.
China on the other hand continues its deceleration, which has been evident for more than 6 months. Its third quarter GDP growth slowed to 6% year on year, down from 6.2% in Q2 and the softest since records officially began in 1992. Fixed investment, which is the main driver of China’s economy, grew at 5.4% for the quarter, far lower than expectations. This now raises expectations that large government stimulus is not far away.
In the UK, it appears progress may have finally been made on settling the Brexit saga. The UK Parliament voted to hold an election on December 12th, and with Boris Johnson and his Conservative Party ahead in the polls, a victory would allow him to move ahead with taking the UK out of the EU.
NEW ZEALAND MARKETS
Gentailers smelting the market
The New Zealand sharemarket lagged behind global peers in October as the S&P/NZX 50 Index returned -1.3%. A significant contributor to this result was the utilities sector as the gentailers saw their share prices fall sharply after Rio Tinto indicated that it would put the NZ Aluminium Smelter up for strategic review, including an option to close it. The smelter currently consumes approximately 12% of New Zealand’s total electricity demand and its closure could have a material impact beyond the utility sector. The four gentailers all ended in negative territory with Contact and Meridian returning -13.6% and -11.5% respectively.
The market seemed to like Fonterra’s (FSF) proposed new strategy and structure as it was the top performer in the Index, returning 18.6%. The company also announced it would increase its 2019/2020 forecast Farmgate Milk Price range by $0.30 to $6.55-7.55. This was on expectations of higher prices for milk solids following the global dairy trade index posting its third consecutive increase. Sky TV (SKT) was the worst performing company in the Index, returning -19.6%. Sky’s shares fell substantially on the news that competitor Spark secured the rights to broadcast all NZ Cricket matches played in New Zealand for 6 years starting in April 2020. A few days later Sky announced a “revolutionary broadcast deal” with SANZAAR, which extends its rugby broadcast rights to 2025 and sees New Zealand Rugby become a 5% shareholder in the company. The share price did rebound on this news before continuing to slide, ending the month near record lows.
The benchmark S&P/ASX 200 Index printed a relatively flat -0.4% return in October, dragged down by weakness in the Financials and Materials sectors, which returned -2.8% and -1.9% respectively. Healthcare was the top performing sector, delivering a 7.6% return.
This month’s best stock performer was British bank Clydesdale, which rebounded +24.5% after several months of being worn down by Brexit uncertainty. The NAB spin-off has now rebranded itself as Virgin Money UK.
Worst performers were radio broadcaster Southern Cross (-33.6%), and logistics software developer WiseTech (-24.6%). Whilst Southern Cross was marked down on a negative trading and guidance update; WiseTech was the latest target of shortseller reports – it was twice halted from trading as management responded to the reports. Also notable was produce grower Costa returning -18% after citrus, raspberry, and mushroom issues culminated in a $176m capital raising via an imaginatively named PAITREO (Pro-rata, Accelerated, Institutional, Tradeable, Renounceable Entitlement Offer) at a steep discount. Year to date, Costa’s shares have returned -48.2%.
Aside from the RBA’s rate cut to 0.75% at the beginning of the month, there was not much excitement on the macroeconomic data front. Annual inflation ticked up from 1.6% to 1.7%, and unemployment was marginally better at 5.2% versus 5.3% as participation declined. Whilst the RBA stopped short of the Fed’s implicit pledge not to raise rates until inflation picks up, its latest statement sings from the same hymn book, indicating a preparedness to further ease policy if required.
A shift in sentiment
Bond yields were slightly higher again for most developed economies, which has resulted in negative returns for global bond markets. The Bloomberg Barclays Global Aggregate Bond Index (NZD hedged) was down by 0.2%, with the largest falls in Europe, UK and Japan, while US bond markets were flat or slightly up. There has not been any real improvement in global economic data, however, sentiment has improved on news of US-China trade talk progress, as well as an extension of Britain’s deadline to exit the EU. These were not enough to prevent the Fed from cutting interest rates this month, but the messaging from the committee is more neutral than previously. The Fed has now reduced rates by 0.75% since July, in addition to reversing the decision to start shrinking its balance sheet. This may be enough to allow the Fed to pause for a period and allow these changes to work through the economy and markets, but as always this will be contingent on the data.
In Australasia, bond yields followed international markets up, which also resulted in negative returns. In New Zealand the impact was magnified for longer maturity bonds where yields rose by more than shorter maturity bonds. This led the to the longer duration S&P/NZX Government Bond Index falling by 1.1% while the shorter duration S&P/NZX Corporate Bond Index was down by 0.4%. The RBNZ is due to make its next OCR decision on November 13th which has recently become more interesting, with market pricing now implying a reasonable chance of rates being left on hold. Like the Fed, the RBNZ has also cut the OCR by 0.75% this year, which has had a sizeable impact on long term bond yields, the exchange rate, and also led to significantly lower mortgage rates. Economic data remains soft, but does not look to have deteriorated in the last few weeks - some data points have actually improved.