Monthly Market Update
As at end February 2020
Equity markets began to properly reckon with the seriousness of the coronavirus’ impact on the global economy in February, with the MSCI World Index (NZD) down 3.6%. A fall in the Kiwi dollar helped insulate NZ-based investors from sharper falls in underlying markets, such as the S&P500, which declined over 8% in USD terms over the month. Other markets including commodities and non-investment grade corporate bonds were also sold heavily; the only real beneficiaries were government bonds. US treasuries in particular have been one of the preferred safe havens, with the yield on 10 year maturities falling to an all-time low of 1.15%.
The cadence and breadth of the sell-off is a clear signal investors are bracing for a significant economic pullback. Market volatility is unlikely to subside until supply chains are restored and more clarity emerges on medical and epidemiological uncertainties around coronavirus. In the near-term, equity markets are hoping central banks will step in and provide stimulus, however at time of writing, actions have seemingly failed to calm markets. The mantle is falling increasingly upon fiscal measures to provide a counterweight to the pessimistic outlook on upcoming economic data. A taste of this sentiment was the most recent OECD forecast for the wealthier countries, where growth was lowered from 2.9% to 2.4%, but with the proviso that a “longer-lasting, more intensive coronavirus outbreak could slash growth to 1.5% this year.”
Another emerging risk for investors in the US market is the presidential election in November. As the large field of Democratic candidates finally thins out, it appears either Joe Biden or Bernie Sanders will be the Democrats’ contender to unseat Trump. Of the two, Biden’s relatively moderate policy stance is considered to be more friendly for corporate America and US share markets in general.
NEW ZEALAND MARKET
It’s good to be home
New Zealand’s reporting season saw some significant share price moves for individual companies; however, the overall market trend for the month was overshadowed by a global pullback amid growing uncertainty surrounding the spread and impact of the coronavirus. Leisure and travel companies bore the brunt, with Auckland Airport, Tourism Holdings and Air NZ returning -9.0%, -16.7% and -19.5% respectively. Though the S&P/NZX 50 Index suffered a 3.9% setback, it outperformed many global peers, some of which fell by more than double this amount.
Highlights were few and far between with standouts being Fisher & Paykel Healthcare (FPH), the top performer on the index, returning 10.6%, and a2 Milk (ATM) not far behind with 8.7%. FPH is one of the few companies that has actually benefited from the virus, seeing increased demand for its hospital devices from China; whilst ATM reported both revenue and margins above guidance on the back of greater inventory buildup ahead of Chinese New Year.
Synlait Milk (SML) did not share the good fortunes of its partner ATM, with its -31.7% return rendering it the index’s worst performer after a significant earnings downgrade earlier in the month. SML mentioned weaker than expected sales into infant formula and volatility in Lactoferrin prices as contributors to lower growth expectations. NZ Refining was also marked down heavily, returning -25.2%. The company noted challenging operating conditions including persistently low refining margins and increased electricity costs.
Reckoning not just for Calendar
An elongated February saw Australia’s S&P/ASX 200 Index return -7.7% as markets began to digest the risk implications of coronavirus. Unsurprisingly, high-beta commodity exposure and elevated valuations were hardest hit. The IT sector returned -17.3%, followed closely by -17.2% for Energy. Utilities and Healthcare were most resilient, returning -3.6% and -3.7% respectively.
Beneath the wide-ranging clamour, an eventful interim reporting season saw several large moves as stock prices recalibrated to new information. Unexpectedly, international education business IDP was the index’s best performer, returning 19.6% on a strong result and placatory comments on the impact of coronavirus. The worst performer was logistics software developer WiseTech, which returned -39.7% after downgrading guidance. Whilst the downgrade was attributed to coronavirus, contention around organic growth and earnings quality compounded the reaction.
In the macroeconomic sphere, unemployment ticked up to 5.3% as a higher participation rate more than absorbed increased jobs. Other backward-looking data also came in soft, among which were December retail sales (-0.5% vs -0.2% expected) and the trade balance ($5.2b vs $5.5b expected). Given recent developments and their impact on commodities, travel, and consumer spending, macro data are likely to deteriorate in coming months. With Australia’s record run of growth under threat, the question now is the extent to which policy will be able to cushion the blow.
Flight to safety
It has been a wild month for all investment markets on mounting concerns about the significant increase of coronavirus cases outside of China. Daily reports of new cases ex-China are now exceeding those within China, and the number of countries reporting cases continues to rise. What was initially thought to be a localised outbreak has quickly morphed into a global threat that is likely to put a significant dent in economic growth. Bond yields have fallen sharply in response, resulting in positive returns for fixed interest markets. The Bloomberg Barclays Global Aggregate Bond Index (NZD hedged) rose by 1.2% for the month.
New Zealand bond markets were also positive, with the S&P NZX Government Bond Index returning 1.5%; while the S&P NZX Corporate Bond Index was up a more modest 0.9%. As has been the case globally, bond yields have fallen sharply and the New Zealand 10 year government bond yield is now below 1% at the time of writing, with shorter term yields well below this. At these levels, bond yields are implying a monetary policy response by the RBNZ, with some economists already expecting OCR cuts as early as this month. Undoubtedly, impacts on the New Zealand economy will be substantial, and we are already seeing the first order impacts of travel bans and trade restrictions on our export industries. However, it is still very early days in assessing the fallout and the appropriate policy response. We doubt that monetary policy alone will provide much of a cushion, but expect RBNZ policy will take direction from what is happening globally.