Monthly Market Update
As at end January 2020
Markets cautious on contagion
The MSCI World Index (NZD) had a strong start to the year, posting a 3.6% rise for January. However, these gains were mainly a function of the NZ dollar falling sharply against major world currencies – the opposite of what happened during December. The year began strongly for most sharemarkets as the optimism from the last quarter of 2019 carried over into January. This momentum was particularly evident in Asia where IPOs (Initial public offerings) were off to their best start since 2007, and in emerging markets, where indices had been rising for seven consecutive weeks by mid-January.
By late January however, realisation that China’s coronavirus outbreak had spread to other countries caused investors to abruptly move into risk-off mode, sending sharemarkets lower in the last week of the month. The outbreak’s seriousness was underscored when China effectively quarantined Wuhan, a city of some 11 million people. Whilst it appears the virus is not as deadly as SARS, which roiled markets in 2002/2003, for the time being, markets are factoring in an economic impact of similar magnitude. This is likely owing to the fact that China now accounts for a much larger proportion of global trade and GDP. Depending on the outbreak’s severity and success of containment efforts, analysts are expecting China to announce large government stimulus to offset some of the impact on economic growth.
In the US, early lead indicators for 2020 point to the broader economy, and specifically the consumer, showing plenty of resilience against a more uncertain backdrop elsewhere in the world. While the American consumer is eating fewer hamburgers (McDonald’s visitations were down 1.5% last year), they are buying more gadgets. Notable from the US reporting season so far were Apple’s stellar earnings and revenue, along with strong results from Microsoft and Tesla. This results season will be closely watched as a bellwether given the slowing trend in 2019.
NEW ZEALAND MARKETS
NZX: Resilient, but not immune
New Zealand’s sharemarket outperformed most global peers save Australia, with the S&P/NZX 50 Index returning 2.0% for the month. This was even after giving up 1.4% in the final week as Coronavirus fears started to impact investor sentiment. Tourism related stocks have already started to see some direct effects with Tourism Holdings the worst among them, returning -13.3%. Longer term; the full impact on companies with significant exposure to China remains to be seen.
The top performer in the Index was Pushpay Holdings (PPH), returning 11.9%. This was a continuation of strong performance in December after PPH acquired a US based church management system, which was seen to be a logical complement to its existing suite of offerings. The worst performer was Gentrack (GTK), which fell 46.7% over the month, falling first after the company announced continuing difficult trading conditions in the UK, and then again a week later when it downgraded its FY20 EBITDA forecast by ~60%. Gentrack’s fourth downgrade in about six months came as regulatory and competitive changes in Australia and the UK continue to impact IT spending plans for Gentrack’s customers. Oceania Healthcare (OCA) also ended near the bottom of the tables, returning -7.6% after a large block trade saw a 41.2% stake in the company sold at a discount.
Old wine, new bottles
The S&P/ASX 200 Index started the year strongly, delivering a 5.0% return for the month, with notable outperformances from the Healthcare and IT sectors, which returned 12.0% and 11.1% respectively. Whilst all sectors were positive, Utilities (+0.6%) and Energy (+0.7%) were left behind.
Skin scaffolding biotech PolyNovo (PNV) was the best performer with a 42.1% return, followed by buy-now, pay-later provider Afterpay (APT) with a 31.7% return. PolyNovo made several positive announcements on sales momentum and progress in Europe; whilst Afterpay scaled new heights after clearing the air about its licensing status in California. With the Australian launch of global rival Klarna in late January, and the proliferation of other competitors, 2020 is shaping up to be a litmus test for the broader space.
American troubles beset aerial imaging platform Nearmap (NEA) and viticulturist Treasury Wine Estates (TWE), rendering them the worst performers in the benchmark. Nearmap returned -33.3% on weaker momentum and churn trends in its US unit; and Treasury Wine returned -19.8%, after its results singled out management issues and intensified competition in the Americas.
Key macroeconomic data released in January included a quarterly inflation print slightly higher than expected and a surprise fall in the unemployment rate to 5.1%, albeit entirely due to growth in part-time jobs. With uncertainty around the impact of bushfires now compounded by Coronavirus affecting trade and travel with Australia’s largest trading partner, the RBA’s decision and remarks will be thrown into greater relief when its meetings resume in February. Specifically of interest is the weight it places on risks, and whether it looks through recent data in its outlook and policy calculus.
A place to hide
Fixed interest markets reacted quickly to the outbreak of the Coronavirus in China, with bond yields falling sharply across the globe. This resulted in strong returns, with the Bloomberg Barclays Global Aggregate Bond Index (NZD hedged) rising by 1.8% in January. Government bonds outperformed corporate bonds as credit spreads started to widen, particularly for higher risk securities. Notwithstanding, this impact was relatively mild and most segments of the market still managed a positive return.
The same theme was evident in New Zealand, with the S&P NZX Government Bond Index rising by 2%, versus the 1.1% delivered by the S&P NZX Investment Grade Corporate Bond Index. The 10 year NZ Government bond yield fell from 1.7% to 1.3%, and at the time of writing had fallen further to 1.2%. Shorter term interest rates didn’t fall as much, resulting in a flatter yield curve. For example, the April 2025 government bond finished the month with a yield of 1.1%, only slightly above the official cash rate of 1%.
This month also saw an uptick in inflation, with December data showing the CPI increased at an annual rate of 1.9%, versus the previous 1.5% annual rate in September. This acceleration has been impacted by changes in fuel and food, which can be quite volatile, but if current trends continue we could see higher rates of inflation in 2020. In the absence of the Coronavirus outbreak, higher inflation would likely have seen bond yields rise, but for now all bets are off until markets have more certainty on the scale of the outbreak. In the short term, the disruption is significant, and the further the virus spreads, the higher the potential for a longerlasting shock to global growth.