July Monthly Market Update
As at end July 2020
Precious Metals Shine
The MSCI World Index (NZD) rose 1.3% over July, helped once again by the US, where stockmarket outperformance is becoming increasingly concentrated. Three areas in particular; internet retailing, technology and communication services, which together make up 44% of the S&P 500 Index, have soared 20% so far this year. In aggregate, the other 56% of the index is down 10% YTD. Other contributors to the month’s performance were emerging markets, with China and Brazil faring best among this group. Big moves in precious metals also made for a spectacle, with Silver up 33.3% playing catch-up with Gold, which rose a further 11%.
With US Q2 earnings season well underway, the standout feature has been the performance of cloud-exposed businesses, particularly the big tech companies. Amazon’s backlog for cloud services in Q2 2020 was up 65% year-on-year, accelerating from 54% in Q1. Sales in Google’s cloud division were up 43% in Q2, while at Microsoft they were up 47%. Evidently, the pandemic has accelerated the shift in corporate spending away from hardware towards subscriptionbased remote data storage and online services.
Over in Europe, economic data releases continue to be significantly better than US and much of Asia, supporting the recent lift in the Euro. The euro area composite PMI (purchasing manager’s index) came in at 54.8 in July, the strongest since June 2018. The services part of the PMI was the big story, rising from a contractionary 48.3 to an expansionary 55.1. Manufacturing, the other component of the index, also managed to post a slightly expansionary reading. Germany and France were the primary contributors to this better reading.
The interest in Gold (and Silver) continued to rise over the month, as they are increasingly being viewed as some of the best hedges against rising uncertainty, and as good diversifiers when other asset classes have become so correlated. Gold, for example, has historically been negatively correlated with the major currencies, so is currently benefitting from the weakness in the US dollar. It also has a strong positive correlation to the size of the Fed’s balance sheet, which continues to expand rapidly.
NEW ZEALAND MARKET
The New Zealand equity market had another strong month, with the S&P/NZX 50 Index returning 2.4%. The Index has now fully recovered ground lost earlier in the year, with a 2.1% return year to date.
Aged care sector momentum continued, with Arvida (+10.3%), Oceania Healthcare (+13.6%), Metlifecare (+15.0%) and Summerset (+21.5%) all posting solid returns, with the latter being top performer in the index. Summerset provided half-year profit guidance of $40m-$45m, which despite being down on the previous year, was better than expected given current circumstances. Metlifecare’s share price rose sharply after Asia Pacific Village Group made a revised offer of $6 per share, which was later endorsed by the board. Another top performer was Mainfreight (+20.4%) following a strong trading update highlighting performance in the Australian market where pre-tax profit was up 167% for the first 17 weeks of 2020 versus the same period in 2019.
The worst performer for the month was Sky TV, which returned -14.0% despite no major news. There was however, some major news regarding the Tiwai Point Aluminium Smelter as Rio Tinto unexpectedly announced plans to close the facility in August 2021. The smelter currently accounts for approximately 13% of New Zealand’s electricity demand, and its closure will cause significant disruption for the electricity sector. The prospect of excess electricity supply and associated lower prices weighed on the Gentailers: Contact Energy (-6.7%), Trustpower (-4.8%), Genesis Energy (-4.0%), Mercury NZ (-0.6%) and Meridian Energy (+1.0%) all posted weak relative returns.
In what was a notable month of mixed fortunes, the S&P/ASX 200 index eked out a 0.5% return for July, despite more than half of its constituents finishing in the red. Materials (+5.8%) and IT (+4.6%) delivered the strongest sector returns, whilst Energy (-6.6%) and Healthcare (-3.9%) fared the poorest.
Investment services group Netwealth and laboratories business ALS were the best performers, returning 33.9% and 29.4% respectively. Netwealth rose on strong growth in funds under administration, and ALS was shored up by hopeful AGM commentary that its most challenging quarter was now behind it. The worst performers were biotech Avita and building products supplier Adbri, which returned -32.6% and -30.5% respectively. Avita highlighted volatility in its quarterly update, and Adbri was jolted by the loss of a major contract.
Mixed fortunes also prevailed over Australia’s public health and macroeconomic data. On one side, strength in iron ore continues to support a strong trade surplus, and policy measures have clearly propped-up payrolls and consumer spending. On the other, non-mining investment remains subdued and Australia’s second most populous state, Victoria, has reinstated severe restrictions in an effort to curb escalating case counts. Against this backdrop, the focus for August reporting season is increasingly on the outlook – specifically indications about the return to a ‘new’ normal and what it might look like for different industries.
Bond markets up again
0800 782 900 | email@example.com | quaystreet.com 4 Global fixed interest markets had another strong month with the Bloomberg Barclays Global Aggregate (NZD) Index rising by 1% for July. As was the case in June, this was driven by lower government bond yields and tighter credit spreads with corporate bonds outperforming government bonds. The trend was particularly evident in the US with the Bloomberg Barclays US Treasury Index returning 1.1% while the Bloomberg Barclays US Aggregate Corporate Bond Index was up by 3.3%. The strong performance of corporate bonds (particularly the high yield segment) has been phenomenal when considering the economic backdrop, and shows just how much of an impact central bank intervention has had on reducing bond yields.
New Zealand bond markets were also positive, but returns were more modest. The S&P NZX Investment Grade Corporate Bond Index was up 0.4%, whilst the S&P/NZX Government Bond Index rose 0.9%. CPI data released this month showed a decline in prices for the June quarter of 0.5%, bringing annual inflation down to 1.5% (from 2.5% in March). This was slightly better than RBNZ expectations and can be mainly attributed to falling oil prices. The outlook for the next 2-3 quarters remains weak and we expect annual inflation figures to drop below 1% before the end of the year. This is a similar trend to what we are seeing globally in the short term, albeit there are also some indications of changing long term inflation expectations. In the US, these are reflected in breakeven inflation rates (the difference between the yield on nominal government bonds and inflation linked bonds) steadily rising since March, and also in rising prices of precious metals such as Gold and Silver. The foremost risk to bond markets is a sudden and sharp re-emergence of inflation, and we are monitoring this closely.