August Monthly Market Update
As at end August 2020
Three Arrows and Moving Targets
The benchmark MSCI World Index rallied 5.1% over August, led once again by the US technology companies. The Japanese Nikkei index was also a big contributor, rising 6.6%, while in the commodity complex Silver extended its stellar run, rising 33%.
US equity market sentiment was helped by the Federal Reserve announcing a policy shift to a more inflationary stance. This also caused the US dollar to fall, in-turn lifting many commodity prices. Commodities, along with other inflation beneficiaries like farmland have been attracting increased attention as investors respond to looser monetary policies around the globe.
Japan’s Nikkei Index turned in a strong performance for the month, despite the resignation of longserving Prime Minister Shinzo Abe due to ill-health. His policies helped shake Japan out of decades of stagnation and included dramatically lifting the female workforce participation rate, and corporate governance improvements. Towards the end of the month, local market sentiment benefitted from Warren Buffet’s Berkshire Hathaway announcing it had made its largest ever foray into Japan, investing US$6 billion across five large trading conglomerates.
Economic news out of Europe continues to be trending in the right direction, underpinning renewed interest in the Euro region and more particularly the Euro currency. Notwithstanding, the recent deterioration in coronavirus trends remains a lingering concern. Spain’s new case count is the highest since April, Italy and Germany’s are at four month highs; and France and Ireland are on the cusp of reinstating social distancing requirements.
NEW ZEALAND MARKET
Staples not so stable
Company reporting season in New Zealand was partly overshadowed by a new community outbreak of COVID-19 and the reinstatement of a level 3 lockdown for Auckland in early August. Despite this unexpected disruption, the market had a solid rally in the second half of the month as the S&P/NZX50 Index returned 1.8%. Although positive, this lagged behind most global peers. The exchange itself also experienced significant disruption after cyber-attacks forced trading to be halted on four separate occasions.
38 of the 50 companies in the Index had positive returns for the month with the top performer, Vista Group International (VGL) returning 43.0%. Whilst VGL’s half-year revenue and profit came in well below last year; however, the market was clearly relieved that monthly cash burn was significantly lower than expected due to many cinemas re-opening and improvement in customer receipts.
The Consumer Staples sector had a rough month with Scales (-6.7%), Synlait Milk (-7.8%), a2 Milk (ATM: -10.8%) and Sanford (-11.2%) all in the bottom 5 performers in the Index. Sanford announced it would be closing its fish processing plant in Tauranga, citing significantly lower processing volumes and failure to meet new seismic strength requirements. Post month end, the company also gave a profit warning as disruption to the foodservice channel continues to impact sales. ATM saw its share price drop after several key executives sold large portions of their shareholdings. ATM also made a $270m non-binding offer to acquire a 75% interest in milk processing company, Mataura Valley Milk as part of its strategy to participate in infant formula manufacturing. The offer has raised questions about the future of ATM’s ’capitallight’ business model and its relationship with Synlait.
‘Resilience’ & Restatements Rescue Results
The benchmark S&P/ASX200 Index returned 2.8% in August, its fifth consecutive positive month. IT and Consumer Discretionary were the strongest sectors, returning 15.5% and 8.7% respectively; whilst Utilities and Telecommunications were weakest, returning -4.8% and -3.8% respectively.
Outsized moves in individual stocks were largely a function of result surprises. Corporate Travel returned 83.2% and IDP Education returned 50.9% on the back of results coming in less worse than feared. On the negative side, Whitehaven Coal returned -32.9%, as higher than expected debt levels stoked concerns about needing to raise capital amidst ongoing weakness in coal prices.
Market reactions to corporate earnings were unusually forgiving, with only one company in the Index returning worse than -15% this August, compared to 23 in last year’s reporting season. This reflects a combination of market participants ‘looking through’ to anticipated earnings postrecovery, management of expectations, and ongoing policy tailwinds supporting risk sentiment.
Extenuating circumstances ensured the ‘get out of jail free card’ was used liberally, with noticeably larger shortfalls between reported earnings and underlying earnings indicating greater add-backs embedded into management definitions of profit. With results muddied by disruption and subsidy impacts, volatility is likely to be a theme in coming months as expectations recalibrate to new data.
Negative Orr Positive
It was a mixed month for global fixed interest markets as longer term government bond yields started to rise, albeit from very low levels. Corporate bonds were less affected, with credit spreads remaining well supported by extremely accommodative monetary policy. The chair of the Federal Reserve, Jerome Powell, gave a speech this month articulating a change in the approach to inflation targeting. The Fed will now target an average inflation rate of 2% over time, rather than 2% as a fixed target; and will also focus more on labour market slack rather than tightness. The change in wording may seem subtle but it is significant as there is now a higher hurdle for tighter monetary policy. In essence, it means the Fed will allow inflation to overshoot in order to make up for prior undershoots.
New Zealand was one of the few countries where bond yields were lower over the month, which saw local fixed interest markets outperform as a result. The S&P NZX Investment Grade Corporate Bond Index was up by 0.9% while the S&P/NZX Government Bond Index rose by 0.8%. With the release of its Monetary Policy Statement (MPS) the RBNZ again upsized its Large Scale Asset Purchasing (LSAP) program, to a maximum of $100bn. It also left the OCR unchanged at 0.25%, but continues to signal the possibility of a negative OCR next year. The case for this has strengthened with the MPS detailing how it would use a term lending (funding for lending) programme in conjunction with a lower OCR to provide extra stimulus to the economy. Most economists have now changed their forecasts to incorporate a negative OCR next year and the Overnight Index Swap (OIS) market is now pricing in a negative OCR in April 2021.