Monthly Market Update
As at end April 2020
Wall Street vs Main Street
Global equity markets staged a strong recovery in April, partly recouping losses experienced in March. The MSCI World Index (NZD) rose 6.6% with the US market again leading the way. The S&P 500 Index returned 12.8% in April, and is now down just -9.3% year-to-date despite over twenty million jobless claims and recessionary conditions taking hold in the US. Interestingly, the S&P 500 has been supported by the five mega-cap ‘FAAMG’ stocks (Facebook, Amazon, Apple, Microsoft, Google), which now make up 20% of the index, versus less than 12% five years ago. Year-todate, this group of five is up 10%, whilst the other 495 companies are down 13% as a group.
Central Banks’ efforts to reflate their respective economies were dealt a blow during the month as the WTI oil price collapsed from around US$19/barrel to a never before seen low of minus US$37.63/barrel. The massive collapse in oil demand caused storage capacity to rapidly fill, and saw storage costs per barrel become more expensive than the oil itself. By month end however, a production cut agreement by oil producing countries coupled with the US threatening military action against Iran stabilised the oil price, allowing it to move back into a positive US$15-20 price range.
NEW ZEALAND MARKET
Level three trading spree
April saw a sharp rebound in sharemarkets with the S&P/NZX 50 Index returning 7.5% after the historic collapse in March. Individual stock returns were solid across the board, with only five companies in the Index posting negative returns. However, volatility continued to remain elevated due to heightened uncertainty around the economic impact of mandated shutdowns.
Uncharacteristically, the worst performing stock was Fisher & Paykel Healthcare that fell 9.8%, retracing some of the exceptional gains it made in March. It is one of the few companies seeing a direct benefit from COVID-19 in the form of increased demand. Another company benefiting from the pandemic, albeit indirectly through increased share market volatility, has been the stock exchange operator itself. NZX reported an 18% increase in revenue for the first quarter of 2020, assisted by a record NZ$6b of monthly turnover in March. Some of the strongest performing stocks in April were those impacted the most in March, including companies exposed to international travel Air New Zealand (AIR), Auckland Airport (AIA), and Tourism holdings (THL), which returned 58.2%, 22.0% and 17.4% respectively. Another example was Restaurant Brands (RBD), which returned 48.2%, staging a “V-shaped” recovery. In its quarterly trading update in late March, RBD stated it was well funded and should “be able to ride out any disruption to the business.” Shoring up balance sheets was the major theme this month, with several companies raising capital from the equity markets and many announcements on renegotiation and extension of debt facilities. The scramble for liquidity comes as numerous companies experience substantial reductions in revenue and respond by cutting costs (including executive salaries), deferring capital expenditure and reviewing their dividends.
Storm abates, guidance cut adrift
Following a historic sell-off in March, the S&P/ASX 200 Index rebounded strongly, returning 8.8% to beat its prior monthly record set in 1993. All sectors chalked-up positive returns, with Energy (+24.9%) and IT (+22.5%) the strongest. Consumer staples (+2.4%) and Utilities (+2.7%) were the laggards.
April’s best individual stock performers were auto dealership AP Eagers and buy-now pay-later operator Afterpay, returning 69.6% and 66.0% respectively after both being heavily marked-down in March. The worst performer was food, liquor, and hardware distributor Metcash, which returned -21.0% after raising capital to support its downstream retailers.
Behind the general upswing driven by extraordinary stimulus and relief rally momentum, two themes dominated corporate activity: withdrawals of profit guidance and capital raisings. Whilst market participants were content to buy now and ask questions later, companies themselves were more circumspect, with scores withdrawing guidance due to near-term uncertainty. Further, many took advantage of the rebound to raise capital. In total, over $15b of raisings were announced or completed in April, the largest being National Australia Bank with $3.6b, followed by Ramsay Healthcare, QBE Insurance, and Oil Search, with $1.2b apiece.
Whilst the wave of raisings has improved liquidity and strengthened balance sheets, the withdrawals of guidance create an information vacuum which will make valuations susceptible to greater volatility in coming months. With earnings expectations for many companies now lacking an anchor, there is heightened risk of disconnect ahead of reporting season in August. This poor visibility extends to the broader economy, with lagging macroeconomic data releases taking a back seat to the outlook for unemployment and credit quality. As Australia’s big banks report their half-year results, the contention thus far around their modelling of economic scenarios and resulting provisions against loans has been telling. Of particular concern is whether these provisions adequately reflect the level of losses likely to eventuate once the dust settles.
Whatever it takes
It was an extraordinary month for investment markets with both equity and bond prices rising strongly despite the rapidly deteriorating economic data. The speed and scale of both central bank and government stimulus packages appears to be the common factor, redefining the “whatever it takes” catchphrase made famous by former ECB President Mario Draghi in his speech about preserving the Euro in 2012. In New Zealand, this sentiment was well and truly embraced by the RBNZ Governor Adrian Orr, with his recent comments highlighting that all options are on the table. The most controversial of these are negative interest rates and direct monetary financing (where the RBNZ lends money directly to the government rather than buying bonds in the secondary market), both of which are the subject of open market speculation.
The RBNZ announced this month that its Large Scale Asset Purchase programme (LSAP) would be expanded to include bonds issued by the Local Government Funding Authority (LGFA). The rationale behind this is it will improve liquidity and drive interest rates lower in this market, and indirectly in the wider corporate bond market. This has certainly been a success as bond yields have drastically fallen and resulted in strong capital gains. The S&P/NZX Investment Grade Corporate Bond Index and the S&P/NZX Government Bond Index recorded highest monthly gains in 10 years of 2.4% and 2.7% respectively. The fall in government bond yields was rapid, with the 10-year yield finishing the month at 0.9%, a new all-time low and now close to half the level it was at the start of the year. This will provide some short-term relief to the government, given the magnitude of government spending currently underway.